U.S. Equities May Face Pressure as Earnings Estimates Fall Short, Warns Morgan Stanley
Strategists at Morgan Stanley caution that U.S. equities could experience sustained pressure in the coming months. They believe that earnings estimates for the fourth quarter of 2023 and 2024 are overly optimistic, and the tightening of policies on both monetary and fiscal fronts could have significant impacts.
Overly Optimistic Earnings Estimates
The equity strategists and their colleagues highlight that many investors are overly fixated on the Federal Reserve’s next moves and stock prices, often overlooking crucial fundamental factors. They stress that earnings estimates for the fourth quarter of 2023 and 2024 are likely to fall short of expectations.
Furthermore, the initial stages of the third-quarter reporting season have been met with disappointing reactions to company results. The median one-day price response has been -1.6% in absolute terms, compared to -0.5% in the previous quarter. Additionally, the percentage of positive price reactions has decreased to 38% from 47% in the last quarter.
The market breadth breakdown indicates ongoing pressure on the index, despite reaching oversold levels in the near term.
Downward Revisions and Risks
In a note, the analysts at Morgan Stanley explain that the S&P 500’s revisions breadth further declined into negative territory. This means that there have been more downward revisions than upward revisions, particularly in Professional Services, Autos, Real Estate Management, and Consumer Services.
These recent developments have raised concerns about the consensus view of a fourth-quarter rally.
It is crucial for investors to consider these factors and avoid solely relying on the Federal Reserve’s actions and stock prices.
Expert Insights
The strategists at Morgan Stanley emphasize the need for a comprehensive understanding of the market and its fundamental drivers. They caution against placing excessive weight on short-term trends and instead advocate for a more holistic approach to investing.
By considering a broader range of factors, investors can make more informed decisions and navigate potential market pressures more effectively.
