According to Morgan Stanley, investors are not in a bull market, and a recession in earnings will still bring stocks down.

  • Investors are not yet in a bull market and stocks will still be ravaged by earnings recession, according to Morgan Stanley.
  • While investors expect the Fed to back off on rate hikes soon, rates could still remain high amid a tight labor market.
  • Markets have also not yet factored in the earnings recession, which could be a major headwind in 2023.

Investors should not believe that they are witnessing the start of a new bull market and a recession in earnings will continue to be a major drag on any growth this year, Morgan Stanley said in a note Monday.

“While the events of the past week did not immediately reverse this latest bear market rally, we also do not think they have provided any evidence that a new bull market began in October,” the strategists said, referring to stocks’ surge last year. once. a week after the meeting of the Federal Open Market Committee. Central banks raised interest rates by 25 basis points on Wednesday, sparking a short-term rally as investors began to appreciate the end of the Fed’s aggressive monetary policy.

Commentators say a pause or cut in rate hikes would be bullish for equities, as rising interest rates hit the market hard last year.

But the headwind hasn’t let up and the rate cut could come later than expected, strategists warn. They note that the Fed can still maintain high interest rates due to a strong labor market and a strong US dollar. Both of these signs suggest that the economy can still weather tighter conditions, and Powell has previously cited a tight labor market as a reason the Fed should remain restrictive in its monetary policy.

“Equity investors really have no reason to worry about rate cuts,” the note said.

In addition, earnings-per-share forecasts for the S&P 500 turned negative last Friday, strategists said, highlighting a strong omen that an earnings recession is about to hit the stock market. Negative earnings-per-share growth has only been seen four times in the last 23 years, and each year has been accompanied by a “significant” drop in market prices.

“What makes this analysis more compelling is that, historically, most of the decline in stock prices has occurred after future earnings-per-share growth turns negative. In other words, this earnings recession is not counting, in our opinion,” the strategists say.

The bank has been warning for months that investor earnings expectations are still too high and the market is not fully pricing in due to a earnings recession that could repeat the 2008 downturn. Shares could fall 20%. first half of the year, according to Morgan Stanley’s chief equity strategist Mike Wilson, who warned investors to brace for short-term volatility.

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