The threat of slowing earnings growth will weigh on US stocks

Earnings quality has also deteriorated, according to the broker, as operating margins have been renewed for many companies and sectors. Furthermore, while second-quarter earnings estimates for companies in the S&P 500 fell, forecast for the full year remained unchanged.

“It effectively raises the bar for the second half of the year, which is about when the economy will feel the effects of rising rates and other headwinds,” said Michael Wilson, chief strategist. American shares of Morgan Stanley.

bear rally

“With valuations now more attractive, equity markets so oversold and rates potentially stabilizing below 3%, equities appear to have embarked on another significant bearish rally.”

“After that, we remain confident that lower prices are still to come.”

The broker marked 3400 points as the level where both valuation and technical support are for the S&P 500 which is more than 15% below its closing level on Friday at 4023.89 points.

While acknowledging that the U.S. stock market has adjusted to higher interest rates, Morgan Stanley noted that the equity risk premium – the return earned from investing in stocks rather than risk-free assets – does does not reflect threats to corporate earnings.

This means that the sell-off that has gripped Wall Street this year will not be complete until valuations fall to levels that account for these earnings cuts, which Morgan Stanley says would be a price-earnings multiple for the S&P 500 14 to 15 times, or until analyst estimates are reduced.

Friday’s gain for the S&The P 500 moved the benchmark away from bear market territory, defined as a decline of 20% or more from the peak.

Them&The P 500 is down more than 16% from its January high, while the Nasdaq, which gained 3.8% on Friday, fell into bearish territory in early March and sits 26.5% below its peak in November.

Recession risk

US corporate earnings also face the impact of weaker economic growth or even a recession as the Federal Reserve rapidly raises rates to rein in rising consumer prices.

Goldman Sachs has joined the chorus of Wall Street companies warning of weaker growth, with senior chairman Lloyd Blankfein urging businesses and consumers to prepare for a US recession, saying it is a “risk very, very high.”

“If I was running a big company, I would be very prepared for this,” Mr. Blankfein said on CBS’ Face the Nation Sunday (Monday AEST) show. “If I was a consumer, I would be prepared for this.”

The comments were released on the same day that economists at Goldman Sachs cut their forecast for U.S. growth this year to reflect dramatic moves in financial markets amid the Federal Reserve’s policy tightening.

The broker now expects the U.S. economy to grow 2.4% this year and 1.6% in 2023, down from 2.6% and 2.2% previously.

Goldman Sachs also lowered its year-end forecast for the S&P 500 by 8.5% to 4,300 over the weekend. He previously predicted a 4700-point finish.

Concerns about economic growth were validated on Monday following data that showed China’s economic activity contracted in April due to the prolonged lockdown in Shanghai.

Global Growth

Industrial production fell 2.9% in April from a year ago, worse than the 0.5% gain predicted by Bloomberg economists.

Meanwhile, retail sales fell 11.1% during the period, weaker than the expected drop of 6.6%. The unemployment rate rose to 6.1%, above the forecast of 6%.

Equity markets across Asia fell on the data, with the S&P/ASX 200 up just 0.2% despite opening up 0.8%.

The economic data provided further evidence to the chorus of concern from analysts and economists who pointed to the potential economic impact of China’s policy of zero COVID-19 cases.

While ANZ maintained its 5% growth forecast for China in 2022, the bank cut its gross domestic product estimate to 4.2% from 5.1% for 2023.