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Morgan Stanley, Goldman Warn of Valuation Risks as Earnings Wither

Morgan Stanley, Goldman Warn of Valuation Risks as Earnings Wither

(Bloomberg) — After printing higher-than-expected inflation and a shock earnings warning for FedEx Corp (NYSE: NYSE), senior Wall Street strategists see increased risks to US earnings and stock valuations.

Profitability headwinds are growing, highlighting monetary policy tightening and pressure on the company’s margins as major concerns, Michael J. Wilson at Morgan Stanley and David J. Costin at Goldman Sachs Group said. According to Wilson, who has been one of the most vocal bears in US stocks, “there is still a long way to go before reality is somewhat priced in.”

While analysts’ estimates of US corporate earnings have been moderate lately, they are still close to record levels — despite a 19% drop for the benchmark this year. โ€œRevisions are often icy,โ€ Morgan Stanley’s Wilson wrote, warning of volatility ahead, amid reliance on corporate guidance and due to the relatively defensive nature of the US index.

The strategist’s comments come after a tough week for US stocks that saw the benchmark fall 4.8%, and after the tech-heavy index posted its worst week since January. Data showing higher-than-expected consumer prices in August fueled concerns about massive Federal Reserve rate increases, while some touted FedEx’s warning as the first of many struggling companies.

“Rising inflation has raised concerns about the outlook for stock valuation and profitability,” Goldman Sachs’ Kostin said. His team expects net profit margins for the S&P 500 to decline by 25 basis points in 2023, adding pressure on returns on equity.

Strategists at Goldman said stocks with higher returns on capital are emerging as pressure increases on profitability and tightening financial conditions. They highlighted companies including Alphabet (NASDAQ ๐Ÿ™‚ Inc. and Domino’s Pizza Inc (NYSE:) and Philip Morris International Inc (NYSE:).

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Meanwhile, Wilson and his team continue to “recommend acquisitions of more defensive-oriented companies with stable earnings and high operational efficiency.”

โ€œBank of Americaโ€ is witnessing new lows for US stocks as the โ€œinflation shockโ€ is โ€œnot overโ€

Michael Hartnett, strategist at Bank of America, echoed Morgan Stanley’s view last week, saying that US stocks haven’t yet seen their worst falls this year amid sharp inflation and hawkish Fed. Hartnett and his team expect the earnings slump to push stocks to new lows.

ยฉ Bloomberg LP 2022

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