Morgan Stanley strategists warn of last shoe to drop

According to Morgan Stanley strategists, the US stock market is likely to fall further after the second quarter earnings season as a result of Bloomberg weakening corporate profit forecasts.

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In the absence of an obvious shock like a recession, companies are slow to guide down, according to strategists led by Michael Wilson in a note on Monday. Stocks can hang around current levels until the second quarter earnings season when the next leg lower is likely to begin and end, as a result of this time. Wilson is one of Wall Street's most prominent bears and correctly predicted the latest market selloff, which was fueled by concerns that a hawkish Federal Reserve would cause the economy to go into a recession. A strong jobs report on Friday fanned those concerns and led the S&P 500 to its eighth weekly decline in nine.

Wilson forecasts the US benchmark will trade close to 3,400 by mid-to- late August, implying another 17% downside from its latest close. The S&P 500 stocks still trade at a median premium of 40% to pre-pandemic levels, compared to 17% for the broader index, he said.

The strategist wrote in the note that these stocks could potentially be the last shoe to drop before we exit the current bear market, so this could potentially present a downside scenario as well.

Wilson said the food and household staples retailing estimates have collapsed over the past four weeks on a sector level in the US. Consumer discretionary and tech hardware have seen weakness in forecasts while real estate has seen the strongest positive revisions over the past month, he said.

In Europe, risks to corporate earnings are growing, according to Sanford C. Bernstein strategists Sarah McCarthy and Mark Diver, who said on Monday that a large margin squeeze may be on the horizon unless consumer demand and sales can counterbalance high inflation.

Not everyone is pessimistic. As we approach the second half of the year, the fundamental risk-reward for equities is likely to be improved, according to JPMorgan Chase Co. strategists, including Mislav Matejka. None of Ukraine's Tactics Are Showing Smaller Countries How to Fight Back

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