Morgan Stanley’s Mike Wilson sees troubled waters.
In itself, that isn’t unusual. Contrary to popular belief, Wilson isn’t a perennial bear (he got the post-COVID rally mostly correct, for example), but he is known for his bearish calls, and particularly for predicting the Q4 2018 meltdown.
He turned cautious on US equities too early last year, and he was hardly alone. BofA’s Savita Subramanian and Jill Carey Hall likewise found themselves calling time on the rally before it ultimately stalled. But Wilson’s thesis looks prescient now.
His latest weekly missive was concise. In one particularly poignant section, he zoomed in on the relationship between equity prices and forward earnings. “Stocks tend to go higher so long as forward estimates are rising,” he said, before noting that in 2022, struggling equities may be trying to tell us something about profits.
“Over the long-term, it’s hard to see, but when stocks diverge from the NTM EPS it usually portends a change in trend,” he wrote. The figures (below) don’t bode well.
History doesn’t repeat, but it does rhyme, and that’d be a bad thing in 2022/2023.
“Could this year be just another example of us reaching an important inflection point for NTM EPS trend? We think it is,” Wilson said, suggesting stocks “may be sniffing out a forward EPS decline.”
Such a decline probably isn’t priced in just yet. US equities aren’t as expensive as they were, but they aren’t cheap. A few high profile guide-downs during Q1 earnings calls could be the last straw for a market obsessed with recession risk.
Referencing stocks’ divergence from the trend in forward earnings in 2022 (which, again, looks quite a bit like the historical episodes illustrated in the figures above) Wilson said simply, “stocks don’t lie.”
Wilson puts words to a discomfort I felt for a long time. Late last year I decided it was finally time to rotate into innovative, reasonably established and profitable small-cap technology companies with good growth horizons. Needless to say, in recent days the purchases I made are taking a seriously cold bath. And at the same time, I find myself rolling the dice against Putin, which was not the table I intended to play when I made these purchases. I hope that inflation will abate next year, and the negative economic effects of sanctions will eventually push Russia to demur from hostilities. But despite all the uncertainty in today’s market, I still believe I’ve made useful investments in good companies with good prospects. Damn the torpedoes!