Why Morgan Stanley Doesn’t Trust the ‘Golden Block’ Scenario

Over the past years, an overview of Morgan Stanley in the markets on his theory that cycles will heat up faster, but they will be shorter. More than two years ago, led the variable income team Mike Wilson He said that this stage will be marked by a stronger, albeit shorter, momentum than it was 50 years ago.

We have partially established this thesisin our comparison with the post-World War II period, It is quite similar to the current one in many aspects, which caused it Inflation and excess income are observed in 2021Wilson begins analyzing it in a recent report distributed to his institutional investors. Both fundamentals and asset prices have returned to previous cycle highs at an historic pace, and that boom into 2021, prompted the Federal Reserve to tighten its monetary policy at the fastest rate in the past 40 years. The reaction was surprising to many.

Now, the stock market team at American Bank says so Many will again be surprised by the depth of the profit decline in 2023 within their estimates and the subsequent recovery in 2024 and 2025. “In a significant departure from the last 30 years, we believe that Stocks are now positively correlated with the rate of change of inflation“, Confirms.

Wilson shows that understanding these dynamics will be critical to generating profitability in the next decade if his analogy of the 1940s and 1950s is correct. “the new The inflation cycle is better for stocks than bonds over a period of time Secular 7 to 10 years, although this new inflationary regime is similar to the period after the Second World War, it will be volatile, with large cyclical swings and falls that must be taken into account if you want to make the most of this new watch. comment.

In his view, the boom-and-bust period that began in 2020 is now at the bottom of the earnings cycle, a dynamic that has yet to be priced in or priced in. “NThe outlook for earnings per share growth for this year is increasingly negative From when we published our forecasts for next year last November, Wilson describes.

This is partly due to the deterioration of the results of the entity’s mathematical and strategic models until the end of 2023. Also Negative operating leverage thesiswhich seems to be about to happen, and the risks of high profits that have resulted from the tension in regional banks, which the research team did not expect six months ago.

“We believe it This will further affect the already stringent lending rules And it increases the potential for a credit crunch, especially for small and medium-sized businesses, and upends the American economy and job market,” Wilson delves into.

Further cut benefits

On the heels of a pandemic-related stimulus surge, the past year has normalized the excess demand many businesses experienced during lockdowns, particularly in the consumer discretionary, telecom services and technology sectors. In addition to the rise in intergenerational interest rates, it is demand readjustment that has lowered the yield on these sectors in 2022.

Many are now starting from the premise of this The worst rate hike is over And that these sectors had already experienced the worst decline in earnings last year and can now expect growth to accelerate in the second half of 2023. In fact, The fresh rebound in earnings growth is already part of the consensus outlookEither on the part of the seller or on the part of the buyer.

“Suffice it to say, we respectfully disagree with that conclusion. More importantly, it’s a significant change compared to the beginning of the year, when our earnings forecasts didn’t deviate from the consensus,” confirms the head of equity at Morgan Stanley.

According to the bank’s conversations with its investors, the buyers had raised their earnings expectations even more (they were more bearish than the sellers’ consensus expectations at the beginning of the year) and this is because, in their own way. Thinking, to see what lCompanies are more optimistic about the second semester, Along with the new enthusiasm around artificial intelligence that sparked a new investment boom.

“Although there is no doubt that this year There will be stocks that accelerate their growth thanks to spending on artificial intelligence, We do not believe it is sufficient to significantly alter the overall trend of cyclical earnings as earnings slow and cost pressure persists. Thus, we are out of consensus in our opinion on the benefits,” concludes Wilson.