The bearish stream of warnings from Morgan Stanley continues unabated. The bank’s wealth management CIO has just made another big call for the firm, saying a correction is likely. Lisa Shallett of MS Wealth management says that the Fed is trying to fight the end of the cycle, and it will likely prove too hard to do. She believes that a recession and correction are highly likely in the next year and that stocks will drop by at least 10%. That said, she advises investors to buy further intro underperforming sectors.
FINSUM: Morgan Stanley says explicitly that they think the bond market’s call on the economy is more correct than stocks and that an economic hard landing is likely coming.
Second quarter earnings season is about to begin, and nobody has much expectation for good news. Analysts across the board expect earnings to shrink, brining back the first profit recession since 2016. Materials, technology, and consumer discretionary are set to get hit the hardest, but the majority of sectors are likely to see losses. Analysts estimate the average earnings decline for the S&P 500 will be 2.8%.
FINSUM: It will be interesting to se if this has any effect on stocks. Given it is so telegraphed, we don’t think there will be a big impact unless the losses are much steeper than expected.
There is a big new risk to stocks to worry about, says Goldman Sachs. Actually, it is a not a new risk, it is an old one that investors have not been thinking about. The risk? Pay. The bank says that rising pay pressure from workers could hurt companies at all levels and eat into margins. The labor market is incredibly tight, which puts upward pressure on pay and downward pressure on corporate margins. Wage growth is already at its highest rate since 2007, and companies may feel the sting. According to Goldman, “While S&P 500 profit margins are at historical highs, survey data indicates a record level of corporate concern regarding labor costs”.
FINSUM: Many analysts have been predicting an earnings recession and this is one of the factors that could exacerbate it.
American investors seem almost conditioned to ignore the rest of the world. Over the last decade that has been a pretty good plan as the US recovery and markets have had a Teflon coating that resisted global downturns. However, rates market in Europe is sending some grave warning signals. Try this on for size: several European junk bonds are now trading at negative yields. Yes, you read that correctly, investors are paying for the privilege of holding junk in Europe.
FINSUM: This is not some ultra-safe Germany sovereign bond that has negative yields. We are talking run-of-the-mill EU junk bonds having negative yields. That is a big warning sign.
The yield curve inversion has largely faded from headlines. Things that become the status quo often do! But in that development lays a hidden but worrying truth—the longer the yield curve is inverted, the more likely it is that there will be a recession. The inversion has been in place for over a month now and it is actually getting worse, with long-term yields continuing to drop. A yield curve inversion has proceeded every US recession in the last 50 years.
FINSUM: If the Fed proceeds with cuts, it seems like the inversion may abate. But then again, the rate cut would be an implicit admission that we are on the way to a recession.