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Morgan Stanley’s top U.S. equity strategist Michael Wilson has made further cuts to the firm’s earnings estimates as he believes the market is yet to hit the bottom in this cycle.
The strategist notes that Morgan Stanley’s “leading models point to continued and increasingly significant EPS growth downside well into 2023.” Along these lines, the 2022 EPS forecast is cut to $220 from $225 and 2023 to $212 from $236. The strategist also made cuts to 2024 EPS estimates.
“Our ’22/’23/’24 base case estimates are now 3%/13%/14% below consensus, respectively. In our base case, 2023 now marks a modest earnings contraction (-3% year-over-year growth), though we do not embed an economic recession in this scenario. The logic here is that nominal top line growth slows, but remains positive (mid-single-digit territory), while margins contract materially (1-1.5% margin compression) driven by sticky cost pressures, particularly on the labor side,” Wilson explained in a client note.
On reasons why Morgan Stanley made new cuts to EPS forecasts, the strategist mentions slowing growth, rather than inflation and the Fed.
“We do not think the bear market is over if our earnings forecasts are correct,” warns Wilson and adds that the S&P 500 hit a “minimum” of 3400 in the fourth quarter while 3000 is in play if a recession arrives.
“From there, we think prices will recover to our base (3,900) or bear (3,350) case June 2023 targets. In the very near term, if back end rates fall, stocks may hold up or even rally until later this month when QT potentially increases and earnings estimates are likely revised lower,” Wilson concluded.