Market Analytics and Technical Considerations
Key Points
According to Morgan Stanley, the Federal Reserve will probably flip like the Bank of England did.
Global US dollar circulation, according to the bank, is currently in the danger area where nasty things happens.
Any Fed reversal, though, shouldn’t thrill stock investors too much because an impending earnings recession, according to Morgan Stanley.
According to Morgan Stanley’s Mike Wilson, worldwide US dollar liquidity is currently in the “danger area where terrible things happens,” making it increasingly probable that the Federal Reserve will change course from its present hawkish fiscal policy.
The Fed will probably need to act similarly, whether it means pausing rate increases or engaging in full-scale monetary easing, just like the Bank of England had this past week by buying long-dated treasuries to quell skyrocketing gilt yields.
The first thing to consider is when the US dollar becomes a US issue. None sure, but additional price movement similar to what we’ve been seeing will ultimately persuade the Fed to ease up, according to Wilson.
However, he warned, investors should just not place too much faith in a prospective Fed reversal. That’s since there will soon be an earnings contraction, and the possible downside for the stock market from a significant earnings reduction would easily exceed the possible gain from a Fed shift.
According to Wilson, the primary contributors to the decline in earnings will be a number of macro risks, such as China’s COVID lockdowns, a rising US dollar, higher interest rates, and Europe’s weak economy.
Wilson asserts, “We suspect that the uncertainty that these factors foster will lead either to guidance pulls or lowered guidance,” both of which would be detrimental to forward earnings estimates.
Furthermore, the anticipated decline in earnings expectations could be significant considering that forward earnings estimates have only decreased by 1% since mid-June.
Because the S&P 500 is such a diverse and high-quality index, it takes a long time for EPS to fall in the following year, and businesses are reluctant to give up on subsequent quarters until they are forced to. “It appears that more businesses are reaching the point where they can no longer fight it,” he added in detail.
Wilson would like the S&P 500’s forward EPS estimates to fall to $225 or lower in conjunction with either a rising equity risk premium or falling ISM PMIs before he is confident that the stock market has reached a sustainable low .Currently, the forward EPS estimate for the S&P 500 is $237.
If there is no Fed pivot, stocks will most likely fall in the end. Wilson, on the other hand, stated, “Just keep in mind that the light at the end of the tunnel you might see if that occurs is actually the freight train of the oncoming earnings recession that the Fed cannot stop at this point.” However, Wilson cautioned that this is not necessarily the case .However, because we are so oversold, a Fed pivot or the anticipation of one can trigger a sharp rally.
