Correction is ‘incomplete’, says Morgan Stanley

  • The S&P 500 index is in free fall this year and its correction is “incomplete”, estimates Morgan Stanley.
  • The investment bank said stocks are vulnerable to disappointing economic growth data.
  • Wall Street analysts, meanwhile, are cutting expectations for year-over-year earnings expansion.

This year’s stock selloff still has some way to go before it’s over as the market looks vulnerable to slowing economic growth, Morgan Stanley said Monday in a note that also highlighted earnings expectations. weakest from Wall Street analysts.

The S&P 500 fell more than 8% in 2022 and dipped into correction territory last month before bouncing back a bit. A correction is a loss of more than 10% from a recent high, and the index in early January hit a record high of 4,818.12.

Investors hammered stocks as

Federal Reserve

is preparing to raise interest rates several times this year to fight inflation, which hit a 40-year high of 7.5% in January. But the market is mired in an “obsession” with the Fed and inflation, Morgan Stanley said.

“While these are still important, the duration and depth of this incomplete correction will be determined by how disappointing growth is, in our view,” said equity strategists led by Michael Wilson.

Morgan Stanley has said it’s more concerned about economic growth than other investment firms, and reading last week’s University of Michigan Consumer Opinion shows why growth is on its radar .

The widely watched consumer confidence gauge for February fell from 79 to 76.2, the lowest reading since August. Much of the drag came from lower economic expectations and households earning less than $75,000 a year reporting setbacks in financial conditions.

“Whether it’s the demand payback or the sharp decline in real personal disposable income, we believe the consumption rate is likely to disappoint expectations in the first half of 2022,” Wilson said. “Furthermore, this lower consumption comes just as supply chains are finally loosening up, which should be helped by the end of Omicron and the labor shortages it has created in industries. transport and logistics”.

Meanwhile, the risk of Russia invading Ukraine significantly increases the chances of a “polar vortex” for the stock market and the economy, Morgan Stanley also said Monday.

If economic growth picks up again, markets can regain some footing, the investment bank said. However, it will also allow the Fed and other central banks to be aggressive in withdrawing monetary stimulus until inflation returns significantly towards inflation targets of 2% to 3%.

Meanwhile, the outlook for 2022 corporate earnings is darkening. Based on how Wall Street analysts broadly revise the numbers up or down, the year-over-year variance in the magnitude of earnings revisions “is now quite negative” at 6.3% versus 27.6% a year ago, Morgan Stanley said.

“This spread tends to lead year-over-year forward earnings and indicates that a sharp contraction will hit in the spring,” he said.

He noted that the rate of change in futures sales has stabilized since mid-July 2021. “Companies are able to maintain pricing power and increase margins when demand/sales at This momentum reverses once sales growth begins to decline,” and that “paints a bleak picture” for operating margins.

The most pronounced downgrades were in transportation, communication services and industrials, while energy, automotive and technology hardware companies lead upside changes, the bank said.

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