Michael Wilson, Bloomberg -- Morgan Stanley's most prominent bearish voice on US stocks, says turmoil in the banking sector has left earnings guidance looking too high, putting sanguine stock markets at risk of sharp declines.
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Given the events of the past few weeks, we think guidance is more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes, Wilson wrote in a note on Monday.
The strategist who ranked No. In last year's Institutional Investor survey, he correctly predicted the selloff in stocks, he said that s partly due to the divergence in stock and bond market action this month. After the collapse of a slate of US banks, equity markets recovered losses on bets of intervention from policy makers, which has resulted in a spike in bond volatility. The S&P 500 is on course to gain for the second straight quarter.
The first-quarter earnings season kicks off in mid-April. The drop in profit estimates so far this year has matched the declines seen in the previous two quarters, suggesting earnings haven't bottomed yet, Wilson said. He said that the threat to margins from elevated inflation is still underappreciated because of expectations of a sharp profit recovery in the second half.
JPMorgan Chase Co. strategists said that the first quarter likely marked the high point for stocks this year, and that they don't expect a fundamental improvement in equities risk-reward until the Federal Reserve signals rate cuts. The team led by Mislav Matejka said that after both bonds and stocks moved in the same direction last year, an unusual occurrence, rising recession odds this year will likely invert that relationship.
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