Morgan Stanley holds a bearish view on US equities, despite a recent 20% rally, due to several reasons. Firstly, the firm believes that earnings expectations are overly optimistic, with consensus estimates projecting 5% sales growth and an 8% decline in earnings. However, Morgan Stanley predicts that revenue growth will decline rapidly, potentially leading to a 15% drop in earnings.
Secondly, rising interest rates and the anticipated 175 basis points increase by the Federal Reserve are concerns for Morgan Stanley. They expect this to negatively impact corporate profits, economic growth, and subsequently, corporate earnings.
Thirdly, Morgan Stanley views the market as overvalued. The current price-to-earnings ratio of the S&P 500 stands at 18, exceeding its historical average of 15.
In summary, Morgan Stanley believes that the risks associated with US equities outweigh the potential rewards. As a result, they advise investors to remain on the sidelines until the market demonstrates signs of a more sustainable recovery.
Additionally, several factors contribute to Morgan Stanley’s bearish outlook on US equities. These include the ongoing war in Ukraine and its potential impact on global growth, the rising cost of living that pressures consumer spending, and the ongoing chip shortage, disrupting supply chains and weighing on corporate profits.
It is worth noting that Morgan Stanley’s perspective aligns with that of other analysts who anticipate a correction in the market, with potential stock declines of up to 20% from current levels.
