Morgan Stanley strategists anticipate a sudden pullback in corporate earnings will slam the brakes on a U.S. equity rally, a call at odds with Wall Street estimates.
Instead, they are bullish on equities in Japan, Taiwan and South Korea and recommend an overweight position in developed-market government bonds, including long-dated Treasuries, and the dollar.
Earnings per share for the S&P 500 are set to drop 16% this year, according to Morgan Stanley strategists led by Andrew Sheets.
That's one of the most bearish predictions among those tracked by Bloomberg, and contrasts with bullish forecasts from the likes of Goldman Sachs Group Inc., which anticipates mild growth.
"We think that the downside risk to US earnings is now," Morgan Stanley analysts wrote in a note published Sunday. "While a deteriorating liquidity backdrop is likely to put downward pressure on equity valuations over the next three months, we also see EPS disappointment ahead as revenue growth slows and margins contract further."
Morgan Stanley anticipates that S&P 500 earnings per share will come in at $185, compared with a median $206 prediction from strategists. Sheets's team sees the gauge at 3,900 at year-end versus Friday's close at 4,282.37.
