Morgan Stanley’s top equity strategist Michael Wilson has once again reiterated his bearish stance on US equities as investors shift their focus towards the Q1 earnings season.

Wilson and his team believe earnings revisions will slow amid 1Q reporting season, amid margin headwinds which are growing and that have not been fully reflected within consensus estimates.

“While we appreciate how inflation can be good for nominal GDP and therefore revenue growth, we think inflation is no longer a net positive for earnings growth given the impact on costs that are now showing up in margins. The war in Ukraine led to an increase in food and energy costs, which have been nothing but a tax for a consumer already suffering from high inflation. In other words, we think the positive effects of inflation on earnings growth have reached their peak and are now more likely to be a headwind to growth, particularly as inflation forces the Fed to remain max hawkish,” Wilson said in a client note.

The strategist is especially concerned about guidances with margin expectations looking “overly optimistic.” On the other hand, he notes that the Morgan Stanley (NYSE: ) Business Conditions Index (an industry survey) dropped to its lowest level in April 2020.

“We think the downtrend is likely to take revisions breadth outright negative, and potentially well into negative territory (similar to what we saw in 2015-2016—a growth consolidation but not an economic recession). This is typically a sign that forward earnings estimates are going to decelerate or at least consolidate sideways,” Wilson added.

Wilson had previously advised investors that they should remain defensively positioned since THE lowest level of equity prices is still to be determined.

By Senad Karaahmetovic