Corporate profits are sliding in 2019, and Morgan Stanley apprises that the Federal Reserve is powerless to halt the trend. “Our earnings recession call is playing out even faster than we reckon oned,” Morgan Stanley says in their latest Weekly Warm Up report. “We are increasingly convinced that consensus earnings beliefs for 2019 have further to fall and that the optimistic uptick currently baked into 4Q 2019 estimates is remote to happen,” they add. The trend of their projections for 2019 S&P 500 EPS is presented below.
Morgan Stanley’s Slashed Forecasts
2019 S&P 500 Earnings Progress Estimates
- Previous Base Case: +4.3%
- Current Base Case: +1%
- Bear Case: -3.5%
- Consensus Estimate: +5%
Source: Morgan Stanley
Meaning For Investors
Morgan Stanley has been ahead of most of Wall Street in predicting deteriorating corporate earnings wart in 2019. Now they see rising odds that earnings actually will decline this year, creating what is needed an earnings recession. Accordingly, as presented above, their base case has fallen from 4.3% year-over-year (YOY) EPS improvement for the S&P 500 to just a 1% increase. But it may get even worse.
“If current estimates move in line with history, we could see a hugely year decline of ~3.5% in S&P earnings,” the report warns. Morgan Stanley has kept their year-end 2019 value targets for the index unchanged, since “a lower [interest] rate environment provides support for year end target [valuation] multiples.” These objectives are: bull case, 3,000; base case, 2,750; bear case, 2,400. Compared to the Feb. 13, 2019 close, these liking represent a gain of 9.0%, no gain, and a 12.8% loss.
However, looser monetary policy from the Federal Save will have only a limited effect. “We do not expect the Fed to be the savior with respect to the earnings headwinds laid out…the shop has already priced in a lot of Fed dovishness,” the report warns.
The current consensus view is that S&P 500 EPS growth will be cool in 1Q 2019, flat for the first half, and average just 1% for the first three quarters. Then a “hockey beetle a unite” rebound creates 9.5% YOY growth in 4Q 2019, bringing the full year increase up to 5%.
By contrast, Morgan Stanley pronounces, “History tells us to expect further downward revisions, higher
Looking Ahead
Morgan Stanley has been at the of the Wall Street pack for several months in anticipating a significant slowdown in earnings growth, and now an outright earnings slump. Given that earnings are the key driver of stock prices, the outlook for continued bull market gains is diminishing.