Morgan Stanley, in a cautionary statement, has forewarned of a potential 16% decline in profits for S&P 500 companies this year. However, the investment bank’s strategists, spearheaded by Michael Wilson, have expressed optimism for a robust recovery in 2024, predicated on their belief that the Federal Reserve’s policy will adopt a more accommodative stance.
In a note released on Monday, the strategists outlined their expectation of a significant rebound in earnings, projecting a remarkable 23% surge for the upcoming year. Morgan, nevertheless, sounded a note of caution by suggesting that the earnings per share (EPS) of S&P companies may experience a decline from $195 to $185 in 2023, before subsequently recovering to $239 the following year.
Wilson shed light on the current phase of the earnings cycle, characterizing it as the “bust” period within the broader boom-and-bust dynamic that commenced in 2020. Importantly, he emphasized that this particular aspect of the earnings cycle has not yet fully factored into market prices.
While maintaining a target of 3,900 for the end of 2023, Morgan predicts that the index will rebound to levels around 4,200 in 2024. As of the most recent closing, the index stood at 4,282.37 on Friday.
The bank acknowledged a range of positive factors that have thus far supported the indexes, including the anticipation of a potential pivot in Federal Reserve policy, ongoing improvements in liquidity, and favorable tailwinds stemming from artificial intelligence advancements that benefit major companies such as Nvidia Corp (NVDA.O).
In spite of these positive elements, Morgan Stanley cautioned that these factors have, to some extent, impeded a market correction.