Morgan Stanley’s Mike Wilson isn’t giving up on it, where “it” is a less-than-rosy take on the prospects for US equities, which came into the second half riding a bull.
Although Wilson readily concedes he’s been wrong this year, he’s reluctant to accept the notion that stocks have the all-clear. One persistent concern for Morgan Stanley’s US equities team is the “earnings impact of falling inflation.” This is a familiar narrative for regular readers and Wilson reiterated the main points on Monday.
“While falling inflation gives more fuel to expectations of a Fed pivot… it also poses a risk to nominal revenue and earnings,” he said, on the way to summarizing the “price-over-volume” strategy adopted by many corporates over the past two years.
Price, Wilson wrote, was “the main factor that held sales growth above zero for many companies.” Given that, it’d be bad news (“a material headwind,” as he put it) were pricing power to wane as inflation recedes and consumers’ buying power finally fades. Morgan Stanley thinks that’s “precisely what is starting to happen for many businesses,” especially goods producers.
Last year’s disappointments on the earnings front were primarily down to forecasting mistakes (e.g., the extrapolation of pandemic trends) and associated bloat. Going forward, it’ll be about disappointing sales. Or so says Wilson, who thinks inflation may be falling faster than some economists believe.
The updated figures below are familiar, and they make a compelling case.
“If we are right about pricing fading amid falling inflation, then sales will likely disappoint further from here,” Wilson pressed, adding that the incoming macro data doesn’t always reflect the pricing reality for individual companies.
He exhorted market participants to remember that in the back half of 2020 and throughout 2021, corporate America was “extracting far more than CPI-type pricing” amid a stimulus-fueled surge in demand (set against constrained supply). That’s going into reverse now, Wilsons suggested.
The figures above are likewise familiar, and they too make a strong case.
Wilson repeated his contention that this reporting season is all about guidance. “Thus far, EPS and sales beat rates have come in above average [but] beats off of estimates that were revised lower into the quarter likely will not be sufficient to materially boost performance,” he wrote. “We think stocks will now need more confirmation of the upturn in growth that consensus expects in H2 given higher valuation and proximity to the second half.”
You have to admire the conviction.
just watching headlines float across my screens the last few days one could observe exuberance entering the building … recession packing up and leaving on vacation. as soon as everybody says the same thing, i start listening to those lone voices in the woods ….
I’ve been busy remodeling since the pandemic started. Up until recently it was all about finding available product and paying more to get it. In the last couple of months ‘sales’ are now common with markdowns 20 to 40 percent.
Whatever “falling inflation” occurs, this will be offset by Congress continuing to spend in excess of collected taxes. Prior to covid, that amount was about $1T annually- but going forward, that gap will be larger, especially as the social security/ medicare funds are emptied.
The second shift in consumer habits that will offset the drag on earnings is that covid “ turned on” the Boomers’ “switch” for spending. They are running out of time to spend their life savings. Once you get “too old”, health concerns will outweigh the desire to spend.
+1 on your comment about COVID turning on Boomers’ switch for spending. I am hearing anecdotal stories from the 45-yr old crowd about their parents spending “too much” money.