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Stocks Have Sniffed Out the Bad News and the S&P 500 Could Be Headed Lower as Earnings Yields the Most Negative Since the 1950s

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© Reuters. Stocks Have Sniffed Out the Bad News and the S&P 500 Could Be Headed Lower as Earnings Yields the Most Negative Since the 1950s – Morgan Stanley’s Wilson

Morgan Stanley equity strategist Michael Wilson has correctly been bearish in the market pulldown and highlights how negative data is piling up. These people tend to follow stocks that have warned for months of bad news. Wilson also points out that Wilson’s real earnings yield has been the lowest since 1950s, despite the high inflation rate.

Wilson points out that stocks know what the news is before they are announced. Stocks picked up on the Fed’s aggressive policy pivot in January. This was evident in the selling of high-multiple stocks in November, December, and December. They are now realizing that this quarter could be their last quarter of good earnings, as higher costs and greater recession risk will impact future growth.

Wilson says stocks don’t provide an inflation hedge that many investors count on due to the rise in inflation. On a six-month basis, Wilson says real stock returns are more likely to outperform real earnings yield. He comments that this suggests there is significant downside at index level. Investors will have to figure it out. “We think the S&P 500 has minimum downside to 3800 in the near term and possible as low as 3460, the 200-week moving average if forward 12 month EPS start to fall on margin and/or recession concerns.”

Wilson believes that earnings expectations will remain high for the next twelve months. He also stated there was growing evidence to suggest that growth is slower than many investors think. According to the strategist, comments by Amazon (NASDAQ) CEO Andy Jassy on Monday’s earnings conference might best capture this outlook than anything.

Our teams today are focusing on improving the productivity and efficiency of our fulfillment network, since we no longer need to chase staffing or physical resources. It’s something that we are skilled at and have successfully done. It will take time as we deal with inflationary and supply-chain pressures. However, we can see positive progress on many dimensions of customer experience including delivery speed performance. We are now near levels not seen since mid 2020.

Overall, Wilson said that S&P 500 has a minimum downside to 3800 (-8%) in the near term. True technical support is located at the 200-week moving mean, 3460 or -16%. Wilson stated that the market is so saturated right now, any positive news could trigger a brutal bear market rally.

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