Morgan Stanley Sees Stocks Suffering on Souring Consumer Outlook

(Bloomberg) -- Souring consumer confidence could soon catch up to stock market investors if this earnings season is clouded by downward guidance revisions.

There’s been an “uncharacteristically” wide divergence between how consumers and investors feel about the economy after the surge in delta virus cases this summer, said Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management. 

“We believe that corporate profit forecasts are vulnerable, especially if consumer sentiment translates into less spending and more savings,” she wrote in a note to clients. 

Typically consumer sentiment moves in tandem with the stock market, as consumption makes up two-thirds of U.S. GDP. But while multiple measures of consumer confidence have plunged since a peak in July, the benchmark S&P 500 has soared, standing just 4% off an all-time high. 

Consumers appear to be weighed down by the slow recovery, inflation worries, and political wrangling in Washington, while investors are more focused on positive earnings revisions and subtle changes in the Federal Reserve’s policies, Shalett said.  

“Critically, the Fed and investors have embraced the view that inflation is transitory -- a view not shared by consumers. If consumer sentiment doesn’t quickly improve, it could be a signal of market weakness that would be sparked by disappointing earnings, weaker spending and higher savings rates,” she warned. 

Metrics that track consumer expectations for the future show that consumers don’t see their concerns about inflation and the labor market recovery as temporary, she said. If that sentiment translates into real action, in the form of less spending and more savings, that could weigh on corporate profit forecasts, and ultimately weigh on stocks. 

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