Morgan Stanley Expects This Shock to Kill Rally

Morgan Stanley anticipates that S&P 500 earnings per share will come in at $185, compared with a median $206 prediction from strategists. Sheets’s team sees the gauge at 3,900 at year-end versus Friday’s close at 4,282.37.

The benchmark is on the edge of a bull market following a 19.7% rally from an October low, gaining amid enthusiasm for artificial-intelligence stocks despite rate hikes from the Federal Reserve and concerns about a potential recession.

Other recommendations from the bank’s strategists include defensive stocks, developed-market investment-grade bonds, and for yield-hungry investors a preference for additional tier-one securities — a type of subordinated bank debt — over high-yield bonds.

To be sure, some strategists are more optimistic than those at Morgan Stanley. An Evercore ISI team led by Julian Emanuel raised their S&P 500 target for the year-end by 7.2% to 4,450.

They said easing inflation likely signals a Fed pause and that dollars “delivered during the pandemic’s darkest days” will support the stock market.

Here are more views from Morgan Stanley strategists:

European stocks may drop as much as 10% over the next few months, though the downside risk is limited due to attractive valuations.
Europe will eventually benefit from a rotation into international cheaper, so-called value, stocks and away from US growth shares
In Asia, the bank’s strategists became the latest China bulls to reduce the target for key stock indexes, citing a delayed earnings recovery, weaker currency outlook and geopolitical uncertainties.