"US Corporate EPS Down 16%"
Optimistic Outlook for Japan, Taiwan, and Korea Stocks
Recommended Defensive Stocks and Developed Market Bonds
The U.S. Standard & Poor's (S&P) 500 index is projected to fall more than 9% by the end of the year.
According to Bloomberg News on the 5th (local time), global investment bank Morgan Stanley forecasted that the S&P 500's earnings per share (EPS) will decrease by 16% this year.
Morgan Stanley expects the S&P 500 index to drop from the closing price of 4,282.37 on the 2nd to 3,900 by the end of the year. The bank anticipates that the sudden decline in corporate earnings will put the brakes on the S&P 500 rally. Morgan Stanley’s EPS forecast for the S&P 500 is $185, which is lower than the median analyst estimate of $206.
Recently, despite concerns over interest rate hikes by the U.S. Federal Reserve (Fed) and fears of a recession, the S&P 500 index has continued its rally, rising 19.7% from its low in October last year and 11.5% so far this year.
Morgan Stanley stated, "We believe there is downside risk to U.S. earnings right now." It added, "Deteriorating liquidity conditions are likely to exert downward pressure on stock valuations over the next three months," and explained, "A slowdown in revenue growth and further declines in earnings are expected to result in disappointing EPS."
Bloomberg News described Morgan Stanley’s outlook as one of the most pessimistic, contrasting it with Goldman Sachs, which expects a moderate rise.
In fact, investors betting on a decline in the S&P 500 index are on the rise. According to investment information firm Bespoke Investment Group, the short positions on the S&P 500 held by investors, including hedge funds, have reached their highest level since 2007. The Wall Street Journal (WSJ) analyzed that without the stock price gains of the seven major big tech companies, the index would have recorded negative returns.
Morgan Stanley identified Japanese, Taiwanese, and Korean stocks as investment assets to watch going forward. It also recommended increasing allocations to long-dated developed market government bonds and the U.S. dollar. Additionally, it highlighted defensive stocks that are less affected by economic cycles, investment-grade bonds in developed markets, and Tier 1 securities such as subordinated bank bonds as attractive investment options.
Bloomberg News reported, "Morgan Stanley believes that a shock to U.S. corporate earnings will end the stock market rally," and "expects greater upside potential in Asian stocks."
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