Deteriorating earnings could send stocks down 5-10%

  • Morgan Stanley’s Lisa Shalett said the recent lack of revenue from tech companies and retailers has worried investors.
  • Snap’s earnings warning this week rattled the stock market, and its CEO shed light on the headwinds facing the company.
  • The investment executive said there could be more earnings cuts and could send an already struggling market down a further 5-10%.

A string of high-profile earnings misses by tech and retail leaders shows stocks buoyed by pandemic-era stimulus are now paying off, according to Morgan Stanley’s Lisa Shalett. time – which could pull the market down.

As the company faces new headwinds, investors will likely see the hit of an earnings revision that is rapidly deteriorating, Shalett said in a note. notes this week.

“The market narrative has shifted from concerns about the Fed’s ability to deliver a soft landing and contain inflation to concerns about corporate earnings and recession risk.


economic recession

,” she says.

“Indeed, some missteps in corporate earnings last week suggest rising costs have dented corporate profits and dampened consumer demand,” she said. wrote.

The wealth management CIO’s comments come a week after Snap lowered its earnings outlook shock the stock marketwhich helps drive losses not only in the tech sector, but across the board.

Share in Snapchat parent Down as much as 38% Facebook’s parent Meta on Tuesday down 9% and Twitter fell 2%.

Snap’s chief executive warned that “the macroeconomic environment will deteriorate much faster than expected” in 2022, which will affect the social media platform’s hiring and revenue growth for the rest of the year.

some type of walmart, Target, Amazon Google parent Alphabet pointed to similar pressures in a recent update as they warned of profits and missed profit targets.

Shalett noted that corporate earnings surged in 2020 and 2021, driven by record government stimulus that skewed consumer demand for goods and “stayed home” early in the pandemic.

This FedTighter monetary policy and slower economic growth weaken these trends as central banks aggressively rate hike Tame red-hot inflation.

“It seems inevitable that corporate earnings will pay off this year,” Shalit said.

“Earnings will take a hit as fiscal stimulus ends, consumers spend more on services at the expense of goods, and inflation hits business spending.”

Morgan Stanley warned that even the biggest tech mega companies are unlikely to be immune to the triple threat of policy tightening, rising inflation and a stronger dollar.

“The next phase of the stock revaluation has already begun after earnings in the retail and tech sectors fell notably last week due to excess inventory, high costs and price-related demand destruction,” Shalett said.

The U.S. had the worst 75-day earnings revision of any market, including Europe, Asia-Pacific and emerging markets, according to Morgan Stanley.

Stocks fell in 2022 as investors fretted about monetary tightening by the Federal Reserve, the risk of an economic slowdown, soaring inflation and the fallout from the war in Ukraine.

high-tech Nasdaq The biggest drop was close to 25%, while S&P 500 fell nearly 15% and entered a bear market, while Dow Jones It has fallen more than 10% so far this year.

With a potential recession looming, the earnings revision shock could further weigh on U.S. stocks, Shalett said.

“Ultimately, we estimate that the stock market index could fall another 5% to 10% due to the recalibration of earnings estimates,” she said.

Morgan Stanley investment chief recommends using the market


volatility

Portfolio development towards maximum diversification, quality factors and active management. She recommends investing the cash in investment-grade bonds, non-U.S. equity funds and cyclical stocks such as financials, energy and industrials.