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Morgan Stanley analysts reiterated their cautious stance on U.S. stocks as they believe the earnings expectations remain optimistic.
While Morgan Stanley’s analysts expect that the U.S. will manage to avoid a recession, they note that the bond market is pricing in 100 bps of cuts starting in June. This has increased volatility in the bond market and they now argue that the stock market will follow as it has became “dependent on company earnings guidance.”
“Given the events of the past few weeks, we think guidance is looking more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes,” analysts wrote in his regular weekly column.
“This is typically how bear markets end—i.e., P/E multiples fall precipitously and unexpectedly, catching many investors off guard. The recent underperformance of small caps and low quality stocks suggests it could be imminent.”
The analysts also reiterated his long-standing view that tech companies are “pro cyclical and not as defensive as perhaps many market participants believe.”
“Be aware that the market can price this concern quickly even before company guidance is lowered,” they warned.
