Recent snapback in markets is premature given potential earnings headwinds – Morgan Stanley

US stocks staged a rapid rebound last week, closing out a dismal January on a high note and building on earnings strength for several positive sessions. Will the market’s resilience last? Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley, explains why the market’s rebound may be short-lived.

Future expectations for corporate sales growth and profits are not impressive

“Corporate profitability forecasts are becoming less upbeat. The rate and degree of earnings surprises have normalized to their 30-year trend, not to mention that major tech bellwethers have begun to miss forecasts. And companies’ own estimates of future earnings are getting hazy, at a time when a measure of positive revisions by analysts to corporate profit estimates continues to decline from last year’s highs.” 

“The consumer spending mix between goods and services is likely to normalize, especially if COVID-19 disruptions finally crest.”

“Costs for businesses remain elevated, but their impact on financial statements may be lagging. We are likely to see a cost side catch-up, with wages, logistics and energy prices all likely to rise meaningfully in the year ahead just as the rapid economic growth from 2021 may be naturally losing momentum.”