- US firms face the most uncertainty since the early COVID era, Morgan Stanley says.
- S&P 500 earnings revisions are approaching downside extremes.
- “Earnings revisions breadth is now at levels rarely witnessed,” Mike Wilson wrote.
Companies are facing more uncertainty than they have in years, and the outlook for earnings is deteriorating at a rapid pace, Morgan Stanley said on Monday.
Trade war uncertainty, interest rate jitters, and looming recession fears are collectively weighing on earnings confidence and causing a vast revision of outlooks for corporate profitability.
Morgan Stanley chief investment officer Mike Wilson notes that S&P 500 earnings revisions breadth — or the number of revisions of future profits — is at “downside extremes.”
“Earnings revisions breadth is now at levels rarely witnessed,” Wilson wrote. “S&P 500 revisions breadth [is] now approaching downside extremes (in the absence of a recession).”
Bloomberg Intelligence data found that estimates for earnings-per-share growth have dropped from 11.4% to 6.9% since the start of the year.
Earnings revisions peaked nearly a year before the S&P 500 achieved its most recent record.
"This is why we are now more interested in looking at stocks/sectors that may have discounted a mild recession already even if the broader index has not," Wilson wrote. "In short, if a recession is averted, markets likely made their lows 2 weeks ago."
To be sure, there is still a risk that the S&P 500 tumbles further. Tariff policy whiplash and anxieties over economic growth have already sent stocks into bear market territory this month, and the S&P 500 could fall another 6% below the 4,800 level due to a handful of factors, including hawkish interest rate policy or a jump in the 10-year Treasury yield past 5%.
Still, Morgan Stanley continues to bet on 5,000 to 5,500 as a reliable range for the index, at least until the current risks are either dismissed or confirmed by upcoming data.