Headed into this year, the buy-side had (begrudgingly, perhaps) come around to a pretty bearish outlook for US corporate profits in 2023.

If you’re old enough to remember January, you may recall that consensus (and here I mean the general macro consensus, not bottom-up EPS consensus) had coalesced around a view that a US downturn was imminent. Fed tightening would finally catch up to the economy, consumers were exhausted, pricing power was set to wane and profits would surely suffer as a result.

It didn’t play out that way. January was a very robust month for consumption, housing showed signs of stabilization in Q1 and when the results were in, corporate profits fell just 3% YoY during the quarter, a much better outcome than even company analysts collectively expected.

Not surprisingly, expectations for corporate earnings have inflected, leaving Morgan Stanley’s Mike Wilson below the (always finger-in-the-wind) buy-side consensus.

“If there is one change since the beginning of the year that is most notable from our client dialogue, it is that investors are now more bullish on earnings,” Wilson said Monday. In January, “many clients were in our camp for sub-$200 EPS this year,” he went on. “We would peg the consensus view now closer to $215.”

In the interest of not burying the lede, Wilson is sticking with it, where “it” is a $195 base case for aggregate, index-level profits. And that assumes no recession.

If you’re following along, you know the rationale. And if you know the rationale, you know there was more evidence to support it last week, when PPI continued to decelerate, small business price hike plans receded further and consumer sentiment tumbled to the lowest since November.

The figures above are familiar, but they’re updated now. The implication is clear enough: Wilson suspects it’ll be more difficult going forward for companies to grow revenue.

Top-line growth was better than expected in Q1 (4% versus 2%), but if consumer sentiment continues to deteriorate and wage bills remain elevated, the read-through is lower margins.

Or at least that could be the read-through, and margin pressure is “the primary driver” of Wilson’s bearish earnings view.

As discussed here over the weekend, consensus expects margins to inflect in the back half of the year. Bears doubt it, and they also question whether Q1 was the trough.

“Many clients do not think revenue growth can fall toward zero or go negative given the still elevated inflation present across the economy,” Wilson remarked, cautioning that in Morgan Stanley’s view, cost-cutting initiatives adopted thus far fall well short of the kind of actions necessary to defend the bottom line in a flat revenue growth environment.

“With the odds of such an outcome increasing, we find it notable that many investors are more sanguine today on the earnings backdrop than they were five months ago,” he mused, before doubling down. “We are not as confident [as clients] in the consensus expectation for a reacceleration in EPS growth through year-end given output from our models and the broad deterioration in leading macro gauges we’ve seen in recent weeks.”