Profit forecasts are too high, says Morgan Stanley
The odds of a year-end rally in US stocks are fading as investors face a multitude of risks from elevated profit estimates to the Federal Reserve’s policy tightening, according to Morgan Stanley’s Michael Wilson.
The strategist — among the most bearish voices on US stocks — said he “would not be surprised” to see further declines in the S&P 500 with “earnings expectations likely too high for the fourth quarter and 2024, and policy tightening likely to be felt from both a monetary and fiscal standpoint.”
Wall Street analysts expect S&P 500 firms to post an earnings decline of 1.1% for the third quarter, before a rebound of 5.2% in the October-December period, according to data compiled by Bloomberg Intelligence. Forward 12-month estimates have also risen close to a record high.
Wilson’s pessimistic view has been somewhat vindicated, with the S&P 500 tracking its third straight monthly decline on worries of higher-for-longer interest rates. On Friday, the benchmark closed at 4,224 points, below its 200-day moving average for the first time since March. That’s considered a key technical support level and used by traders to assess whether the longer-term trend is up or down.
The combined outlook for earnings, valuations and policy means that the S&P 500 “will have a hard time” getting back above 4,300 to 4,400 points — which were previously considered levels of tactical support, Wilson said. The strategist has a year-end target of 3,900 — nearly 8% below current levels.
The chorus of Wall Street strategists warning about a subdued end to the year has grown in recent weeks as stocks also face renewed geopolitical risks. The macroeconomic uncertainty as well as US bond yields nearing 5% have overshadowed the third-quarter
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