Morgan Stanley, Goldman Say Stocks Have Yet to Find a Bottom

JPMorgan Chase & Co. strategists say that markets could look through more challenging earnings-related newsflow over the summer.

Stocks generally tend to peak at or ahead of the earnings trough, strategists led by Mislav Matejka wrote in a note on Monday, adding that the market could be nearing a point where bad data start to be seen as good news.

But Morgan Stanley’s Wilson, who has been one of the staunchest equity bears this year and who correctly predicted the latest selloff, said he was “skeptical” about expectations that margin pressures would ease beyond the second quarter.

“The combination of continued labor, raw material, inventory and transport cost pressures coupled with decelerating demand poses a risk to margins that is not reflected in consensus estimates,” Wilson said, adding that even if estimates for revenue growth remain static, a return to pre-Covid net margin levels implied a 10% hit to forward earnings-per-share.

Goldman Sachs strategist David J. Kostin said in a note on July 15 that he expects the weak macroeconomic outlook to threaten companies’ profitability, which has already receded from record highs.

Margins and borrowing costs are now two key risks for stocks’ return-on-equity, which held up in the past year despite rising input costs, omicron and supply chain disruptions, he said.

But in the meantime, Goldman’s Oppenheimer is more bullish about the next 12 months for equity markets. “Keep in mind bear markets nearly always trough when you’re in a recession and data is bad and earnings are still being revised down,” he said on Bloomberg TV, adding that cyclical stocks and technology are likely to lead the rally once equities show a meaningful recovery.

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