Expect the stock market to be “driven more by earnings than macro,” says Morgan Stanley’s Wilson

The earnings season will be a major test for the stock market after the S&P 500 completed its worst half-year performance since 1970 last week, strategists at Morgan Stanley said.

Stocks’ future direction will be mostly tied to second-quarter earnings, according to a Morgan Stanley MS, as rate hikes and rising inflation more accurately reflect the slowdown in growth.
-0.83%
report on Tuesday.

“We are in the midst of the economic slowdown that we have anticipated,” Morgan Stanley strategists, led by Michael Wilson, chief investment officer, wrote in a note to clients. “Furthermore, due to the war in Ukraine and China’s expanded zero-Covid policy, this slowdown is even worse than we anticipated.”

“We think most investors are also in our camp now, trying to determine how much earnings need to fall,” they wrote. “… In short, going forward, stock prices should be driven more by earnings than macro.”

Continue reading: Credit Suisse cuts S&P 500 target again for 2022 as US stocks fall

Earnings season begins next week with earnings from PepsiCo Inc. PEP,
-0.22%,
Delta Air Lines Inc. DAL,
+1.02%,
JPMorgan Chase & Co. JPM,
-0.38%
and Morgan Stanley MS,
-0.83%,
then pick up with the pace.

“Equities markets could linger and even recover in the absence of confirmation of a recession,” the strategists wrote. “Conversely, without confirmation, a recession will be avoided and it will also be difficult for stock markets to recover too far. As we discussed, even as a result of the soft landing, the revenue is too high.”

Under this scenario, Morgan Stanley expects the S&P 500 SPX,
+0.16%
to achieve a fair value target of around 3,400 to 3,500. However, if the economy goes into recession, the index could drop to 3,000 points by the end of this year — “a temporary breach of our price target of 3,350 at the time of the June 23 bear drop,” they wrote.

The large-cap benchmark erased an early decline to gain 0.2% to 3,831.39 on Tuesday, trailing 19.6% year-to-date after US markets closed on Monday for the public holiday July 4 were closed. The Dow Jones Industrial Average DJIA,
-0.42%
closed nearly 130 points lower, down 0.4% after falling more than 700 points from its session low, while the technology-heavy Nasdaq Composite Index COMP,
+1.75%
rose 1.7% as government bond yields fell.

Continue reading: Why stock market investors are “nervous” that an earnings recession is looming

Other strategists said investors are waiting for profits and, more importantly, company guidelines.

“The ongoing search for clues as to whether the market stage can stage a strong rebound in the second half of the year will begin with what companies have to say during their second-quarter earnings calls,” wrote Quincy Krosby, chief equity strategist LPL Financial. in an email. “Though negative earnings revisions are mounting, overall expectations for the second quarter remain surprisingly solid despite ongoing constraints impacting companies’ operating margins.

However, Morgan Stanley warned investors that during this phase of economic slowdown, companies could potentially take different paths and send conflicting signals to investors.

“Our experience is that higher quality companies admit the problems sooner and set reasonable expectations given the deteriorating macro environment,” they wrote. “But that process may be taking longer than it should, and this time is likely to be no different.”

Continue reading: Why this Morgan Stanley portfolio manager is ‘gradually’ becoming less defensive on stocks as recession fears mount

https://www.marketwatch.com/story/expect-the-stock-market-to-be-driven-more-by-earnings-than-the-macro-says-morgan-stanleys-wilson-11657055593?rss=1&siteid=rss Expect the stock market to be “driven more by earnings than macro,” says Morgan Stanley’s Wilson

Brian Lowry

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