Rising earnings correction could further reduce stocks by 5% to 10%,

According to a note from Morgan Stanley’s asset-management division, the U.S. company’s earnings correction is “rapidly declining” threatening to deepen stock-market losses so far this year.

“Negative earnings correction and negative economic surprises could lead to a further 5% to 10% decline in the S&P 500,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, in a note Monday. “With a period of significant ‘excessive earnings’ over the past two years, a return to average now makes the U.S. earnings correction the worst of all regions.”

Morgan Stanley Wealth Management dated May 23, 2022

The U.S. stock market has plunged into high inflation this year as the Federal Reserve seeks to control it by raising interest rates. S&P 500 Index SPX,
+ 1.78%,
Which briefly avoided a bear market last week, based on early trading on Monday, is still down more than 16% in 2022.

Against the backdrop of rising rates and rising inflation, “positive earnings momentum has become important in controlling stock market losses,” Chalet said. “But as inventory reconstruction matures and consumers shift their purchases away from services and products, earnings expectations remain in their days of reckoning.”

Read: Buy Deep? Sell ​​’Rip’? The fear of ‘sticky’ inflation raises consumer concerns, which is what lies ahead for stock investors.

In Chalet’s view, after benefiting from record government stimulus following “extraordinary” results in 2020 and 2021 during the Covid-19 epidemic, “2022 was appropriate to be a year of payments.” The Fed is now tightening monetary policy to cool the economy as it aims to curb rising living costs.

The stock market has been “driven by the Fed’s plan to reassess inflation expectations and reduce interest rates and balance sheets,” he wrote. The next step is the re-alignment of profits and economic forecasts from the volatile level of V-shaped 2020-21 recovery. “

That “restoration” has begun, Shalett said. He pointed to the loss of earnings in the retail and technology sectors last week “due to excess inventory, high costs and the destruction of price-related demand.”

Major U.S. benchmarks rose sharply in early trading on Monday afternoon. S&P 500 showing 1.8% gain, Dow Jones Industrial Average DJIA,
+ 2.05%
2.1% and Nasdaq Composite Comp,
+ 1.30%
According to FactSet data, the stock was trading 1.4% higher at the last check.

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