HomeStocksMorgan Stanley Warns of Slump in Profitability That Will 'Sink' Shares

Morgan Stanley Warns of Slump in Profitability That Will ‘Sink’ Shares

Jonathan Ponciano ‘ S
Morgan Stanley’s chief investment officer warns that upcoming corporate results announcements will likely disappoint investors, pushing Wall’s major indices to two – year lows even if the economy eventually avoids recession-but there’s a bright side: the analyst sees the end of the bear market not far off, putting it even within the current quarter.

“We are not ‘stung’ by the recent rally, ” Michael Wilson of Morgan Stanley said in a note, as on Monday the S&P 500 and Nasdaq were at +5% and +9% respectively since the beginning of the year, after falling 19% and 33%, respectively again, in 2022.

With consumer spending slowing and high costs clipping profits, Wilson says a profitability downturn is coming and that fourth-quarter results to be announced in the coming weeks will bring disappointment to investors, according to Morgan Stanley estimates that are well below average analysts ‘ forecasts.

Wilson warned, noting that this year’s rally is fragile, as earnings are driven by “low-quality, sharply shortened stocks”: AMC and GameStop, for example, have jumped 45% and 23% respectively.

Morgan Stanley predicts the S&P 500 could fall by as much as 25 percent to a two – year low of 3,000 points, with Wilson noting that once the fourth quarter results reveal the companies’ full potential, the bear market will end-either later in the current quarter or early in the second.

Morgan Stanley’s ominous “Oracle” is not the only one: the assessment that this stock market rally is fake is shared by others. Analysts at Goldman Sachs estimated last week that the S&P 500 would slide by as much as 22 percent in the spring if the economy goes into recession, and if we don’t have a recession, they see a further 10 percent drop for the indexes, to close the year at around their current levels.

“When costs rise more than sales, the profit margin shrinks. That’s the norm in any unexpected revenue slowdown, ” Wilson notes, adding that sales are falling quickly and unexpectedly while costs remain high.

The stock market collapsed in 2022 as interest rate hikes by the Federal Reserve slowed the economy in an attempt by Fed officials to curb inflation, and erased the excess gains of a string of stocks that have found room to rally amid a pandemic thanks to government initiatives to stimulate the economy. Companies cut more than 100,000 jobs in 2022, with layoffs escalating in recent weeks after Alphabet and Amazon announced their own measures to cut spending. The fourth-quarter corporate results period began earlier this month with major U.S. banks announcing gross figures. Among the hardest hit, Goldman Sachs lost more than 6% in the wake of the biggest profit decline in 10 years.

The barrage of corporate results continues with tech giants Tesla, Microsoft and IBM announcing their financial figures this week, while Apple, Amazon, Meta and Alphabet will take over next week.


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