A rally in stock markets may prove short-lived as inflation pressures remain high and a recession looks increasingly likely, according to strategists at Morgan Stanley and Goldman Sachs Group.
While stocks’ decline since the beginning of the year reflects investors’ expectations of a slowdown in growth, “I don’t think a deep recession is being priced in yet,” said Peter Oppenheimer, chief global equity strategist at Goldman Sachs.
“It’s premature to believe that inflation is going to come down quickly or that pressure for the Federal Reserve and other central banks to tighten has eased,” he said on Bloomberg TV.
For Morgan Stanley’s Michael J Wilson, the odds of a US recession continue to rise with the corridor model showing a 36% chance over the next 12 months, while other warnings include an increase in jobless claims and a drop in job offers.
“The counter-trend rally may continue, but make no mistake, we don’t think this bear market is over, even if we avoid a recession,” he wrote in a note Monday.
Top Wall Street strategists urge caution as US and European stock markets rise amid bets the Fed won’t make a mammoth rate hike at its meeting next week, and as new data showed a larger-than-expected drop expected in the long-term inflation expectations of US consumers.
But Oppenheimer cautioned that even if the headline inflation figure starts to decline, it’s too early to expect consumer prices to do the same quickly.
With the macroeconomic outlook remaining gloomy, investors are turning to corporate earnings season to see if margins have withstood rising prices and gloomy sentiment.
Strategists at JPMorgan Chase say markets could face a more challenging earnings-related newsflow over the summer. Stocks generally tend to peak on or before corporate earnings season, strategists led by Mislav Matejka wrote in a note on Monday, adding that the market may be reaching a point where bad data begins to trickle down. be seen as good news.
But Morgan Stanley’s Wilson, who has been one of the staunchest stock bears this year and correctly predicted the latest sell-off, said he was “skeptical” about expectations that margin pressures would ease beyond the second quarter. .
“The combination of continued pressures from labor, raw material, inventory and transportation costs, coupled with slowing demand, poses a risk to margins that is not reflected in consensus estimates,” Wilson said, and He added that even if revenue growth estimates remain static, a return to pre-COVID net margin levels implied a 10% hit to future earnings per share.
Goldman Sachs strategist David J. Kostin said in a July 15 note that he expects the weak macroeconomic outlook to threaten corporate profitability, which has already slipped from record highs. Margins and borrowing costs are now two key risks to the stock’s return, which rebounded last year despite rising input costs, omicrons and supply chain disruptions, it said.
But in the meantime, Goldman’s Oppenheimer is more optimistic about the next 12 months for equity markets, adding that cyclical stocks and technology are likely to lead the rally once equities show a significant recovery.
