Skip to Content

Expect Further Negative Earnings Revision in 2023 – Morgan Stanley

Michael Wilson from Morgan Stanley, the number one rated portfolio strategist in 2022, recently came up with his data-focus outlook for 2023.

The main theme is falling earnings per share, and given where the market prices are, he believes there are further downsides to go.

Here are some notes from his research.

Fire and Ice – Fire is inflation, and Ice is slowing growth. Together, they are pretty toxic, and when ice takes over the fire, they are more confident that bonds will beat stocks in this final phase that has yet to play out.

The ratio of equity to bond may show that bonds may outperform stocks.

Subsequent Rate Cuts Matches Recession and Further Equity Downsides

We all cheer about what rate cuts will bring, but usually, the window of opportunity is the period of pause often, the Fed will start lowering rate, which is usually done to combat recession.

Equities usually have ways to fall while Fed is still cutting rates (Exhibit 3)

EPS Growth Likely to Go Further Negative

Morgan Stanley’s leading earnings model was seldom wrong when viewed over the longer term. There were some short-term timing issues.

But the gap between indicator and actual S&P 500 last twelve months growth has never been this wide since 2008.

During periods of high inflation (CPI) the fall in earnings tends to be bigger. When the cost of goods sold + SGA expenses are positive (cost more than sales), the net income growth tends to be negative. The inverse relationship between net income growth and cost is there.

S&P 500 EPS Estimates and S&P 500 Forecast

Whether the scenario is pessimistic or optimistic, the EPS should come down, and based on reasonable P/E, the price target ranges between 3,500 to 4,200 for the S&P 500.

The average PE during earnings recessions: is 12.5 times. We have much to go.

Sector Preferences – Healthcare, Consumer Staples and Utilities

Small Cap Valuation and Performances

Morgan Stanley does not favour small caps relative to large caps due to higher earnings risks.

Small cap valuation, using P/E is cheaper relative to history and against the large cap.

Small-cap earnings have held up much better than the large-cap in 2022, but the earnings expectations in 2023 tend to be negative.

Equity Risk Premium is Thin Relative to History


I invested in a diversified portfolio of exchange-traded funds (ETF) and stocks listed in the US, Hong Kong and London.

My preferred broker to trade and custodize my investments is Interactive Brokers. Interactive Brokers allow you to trade in the US, UK, Europe, Singapore, Hong Kong and many other markets. Options as well. There are no minimum monthly charges, very low forex fees for currency exchange, very low commissions for various markets.

To find out more visit Interactive Brokers today.

Join the Investment Moats Telegram channel here. I will share the materials, research, investment data, deals that I come across that enable me to run Investment Moats.

Do Like Me on Facebook. I share some tidbits that are not on the blog post there often. You can also choose to subscribe to my content via the email below.

I break down my resources according to these topics:

  1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
  2. Active Investing – For active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
  7. Providend – Where I used to work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works
  8. Havend – Where I currently work. We wish to deliver commission-based insurance advice in a better way.
Kyith

This site uses Akismet to reduce spam. Learn how your comment data is processed.

This site uses Akismet to reduce spam. Learn how your comment data is processed.