Morgan Stanley Sees No 2020 Rebound in S&P 500 Company Profits
(Bloomberg) -- Morgan Stanley turned more cautious on U.S. corporate earnings, slashing its forecast for next year as President Donald Trump’s escalating trade skirmishes weigh on an already fragile global economy.
Strategists led by Mike Wilson, whose forecast for a decline in profits this year is gaining traction on Wall Street, now predict S&P 500 companies will earn $162 a share in 2020, unchanged from what’s expected in 2019. They had forecast a 5% increase. If the new call bears out, corporate America will notch two consecutive years of zero profit growth, the weakest stretch since the 2015-2016 oil-induced recession.
“Even in the absence of incremental trade escalation, our earnings model was already calling for negative EPS growth over the next 12 months,” Wilson wrote in a note to clients. “Trade tensions add to the downside in earnings.”
While an outlier at the start of the year, Wilson’s projection that companies will suffer two consecutive quarters of profit declines in 2019 has found more allies. Last week, strategists at both Bank of America Corp. and Citigroup Inc. reduced profit forecasts while pointing out the risk of a recession.
U.S. equities have defied the worsening earnings sentiment as the Federal Reserve opened the door for interest-rate cuts. The S&P 500 rallied 4.4% last week for the best gain since November as weaker-than-expected data on payrolls helped spur speculation that the central bank may lower rates as early as July. The index rose for a fourth day Monday after Trump removed the threat of tariffs on Mexico, easing one front in his trade spats.
But another, bigger threat still looms, Morgan Stanley noted. An extended trade war with China threatens to darken what’s already a bleak profit picture, Wilson said. The extra costs from higher imports on Chinese goods would hurt profit margins, with autos, electrical equipment & machinery, textiles, computers/electronics, and certain chemical/commodity industries most vulnerable, the bank estimated.
Earnings in the S&P 500 came very close to falling in the first quarter. Analysts expect profit to fall 2.7% for this quarter before rising slightly in the third period.
The potential for Fed easing has helped stocks stay afloat, but the market needs solid fundamental data to sustain the momentum, according to Wilson. At 2,900, the benchmark index is at the high end of a range of 2,400 to 3,000 that he predicts for the year.
“Investor enthusiasm around the idea of easier Fed policy is understandable,” Wilson wrote. “However, if the Fed were to cut out of concern that we are entering a real unemployment cycle, we think such a cut should not be bought. Until there is further clarity on the employment picture, we think Friday’s rally should be faded and investors should continue to skew portfolios defensively.”
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