Be cautious of the "earnings kill" in the US stock market! Morgan Stanley warns: the market is overly optimistic

According to the Zhitong Finance and Economics APP, strategists at Morgan Stanley have warned not to expect a bullish earnings season to drive the U.S. stock market higher, as most of the optimism has been priced in after this year's record rally.

Led by Mislav Matejka, the research team at Morgan Stanley stated that first-quarter profit expectations have been lowered, reducing the threshold for U.S. companies to exceed expectations. Strategists mentioned that excluding tech giants, earnings for S&P 500 index constituents are expected to decline across the board.

Matejka noted that investor positioning appears "very tight." Due to optimism about the resilience of the U.S. economy and declining interest rates, the U.S. benchmark index has risen to record highs.

He said, "The stock market has performed well, indicating that investors are more optimistic than the bearish profit forecasts conveyed by sell-side analysts." "We need to see a clear earnings acceleration to prove that current stock valuations are reasonable, and we are concerned this may not materialize."

Earnings expectations for S&P 500 index constituents are declining

Matejka mentioned that half of the U.S. companies that have reported earnings so far have underperformed the market on the day of the announcement.

Despite a 10% increase in the S&P 500 index in the first quarter, Morgan Stanley's stock strategist remains one of the more bearish on Wall Street. After higher-than-expected inflation data reduced the likelihood of a Fed rate cut, U.S. stocks saw a slight pullback. The unprecedented Iranian attack on Israel has intensified geopolitical tensions, adding to market volatility.

Matejka stated that the stock market has underestimated the impact of rising price pressures on Fed policy and bond yields.

He said, "While some of the move in yields may be due to optimistic growth prospects, we believe most of it is being driven by sticky inflation." "Risks of rates spiking for 'wrong reasons,' a complete reversal of Fed policy stance, and sustained overheating of inflation are all rising."

Morgan Stanley strategist Michael Wilson also issued a warning about the impact of higher rates on stock valuations. He expects that as the U.S. 10-year Treasury yield climbs above 4.4%, the stock market will show greater sensitivity to interest rates.

"On the surface, as the market becomes more discerning about quality and earnings power, valuation dispersion is increasing," Wilson stated. "Market reactions during earnings season may reveal how much risk there is in valuations."

Not everyone is as pessimistic. Manish Kabra, a strategist at Societe Generale, expects a strong earnings season to continue driving the U.S. stock market higher. He stated last week that while rising U.S. bond yields may have a negative impact on the S&P 500 index, "the long-term stabilization of Fed rates should suppress yields." ”