Earnings slump could send stocks down 5-10%
- Lisa Chalet of Morgan Stanley said the recent loss of revenue from tech companies and retailers is worrying investors.
- Snap’s earnings warning this week rattled stock markets, as its CEO explained corporate headwinds.
- The investment chief said further profit cuts are likely and could push the already struggling markets further down by 5-10%.
A string of eye-catching gains missed by tech and retail leaders suggests it’s time to reclaim stocks buoyed by pandemic-era stimulus — and that could send markets lower, according to Morgan Stanley’s Lisa Chalett.
As companies face fresh headwinds, Shalit said in a note this week, investors can expect a shock from earnings revisions, which are deteriorating rapidly.
“The market story has shifted from concerns about the Federal Reserve’s ability to implement a soft landing and tame inflation, to concerns about corporate earnings and corporate risks.
“In fact, some of the corporate earnings failures last week highlighted rising costs that impacted company profits and dampened consumer demand,” she wrote.
The Wealth Management CIO’s comments come within a week when Snap’s earnings forecast cut hit the stock market, helping to incur losses not just in technology, but across the board.
Shares in Snapchat’s parent company fell as much as 38% on Tuesday, while shares in Facebook’s Meta tumbled 9% and Twitter was down 2%.
Snap’s CEO warned that “the macroeconomic environment has deteriorated further and faster than expected” in 2022, which will impact employment and revenue growth for the social media platform for the rest of the year.
The likes of Walmart, Target, Amazon and Google parent Alphabet have all pointed to similar pressures in recent updates, warning of lost profits and profits.
Shalit noted that corporate profits soared in 2020 and 2021, driven by record government incentives that skewed demand among consumers toward goods and “stay home winners” in the early days of the pandemic.
These trends were dampened by the Fed’s monetary policy tightening and slowing economic growth, with the central bank aggressively raising interest rates to tame hyperinflation.
“It seems inevitable that there will be some payback in corporate earnings this year,” Shalit said.
“With the end of fiscal stimulus, consumers spend more on services at the expense of goods, and inflation affects corporate expenditures, profits will be hit.”
Morgan Stanley has warned that even the biggest tech giants are unlikely to be immune to the triple threats of tighter policy, higher inflation and a stronger dollar.
“With the notable profit loss last week in the retail and technology sectors due to excess inventories, higher costs and the destruction of price-related demand, the next phase of inventory revaluation has begun,” Shalit said.
US 75-day earnings reviews were the worst among all markets, including European, Asia-Pacific and emerging markets, according to Morgan Stanley.
Stocks tumbled in 2022 as investors worried about the Fed’s monetary tightening, the risk of an economic slowdown, rising inflation and the impact of the Ukraine war.
The tech-heavy Nasdaq is down the most, down nearly 25%, the S&P 500 is down about 15% and is flirting with bear territory, and the Dow Jones is down more than 10% in the year to date.
With a possible recession looming on the horizon, the earnings revision shock could trigger a further decline in US stock markets, according to Chalet.
“Ultimately, we estimate that stock market indices may suffer another 5% to 10% drop from earnings expectations reset,” she said.
The chief investment officer at Morgan Stanley recommended using the market
To move portfolios towards maximum diversification, quality factors and active management. It recommended the distribution of cash in investment grade bonds, non-US equity funds, and cyclical cycles such as finance, energy, and industry.