Morgan Stanley says earnings shield S&P 500 from Iran war
Wall Street analysts remain optimistic, expecting a 12% growth in Q1 profits for companies on the index
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[ZURICH] Accelerating earnings are protecting the S&P 500 from deeper losses and masking a broader pullback in US equities, said strategists at Morgan Stanley.
The team, led by Michael Wilson, pointed to resilient earnings and continued economic recovery as reasons why the S&P 500 has fallen less than 10 per cent since hitting a record high in January.
Beneath the surface, they observed that stocks are in the “final phase” of a correction.
There are better gauges to assess the US stocks retreat, they argued: Forecast earnings per share for the S&P 500 have dropped 18 per cent from an October peak, and more than half of Russell 3000 stocks are down at least 20 per cent.
“To us, that’s not complacency, but a market that has appropriately and surgically discounted the risks both at the index and stock level,” Wilson said.
Risks from private credit and artificial intelligence disruption have also been accounted for, he added.
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The S&P 500 was set for renewed losses on Monday (Apr 13).
This came after talks between the US and Iran failed to produce a diplomatic resolution over the weekend, and US President Donald Trump ordered a blockade of the Strait of Hormuz.
Despite all the risks, Wall Street analysts remain optimistic; they expect a 12 per cent growth in first-quarter earnings for companies in the S&P 500.
The reporting season kicks off this week, with Goldman Sachs releasing its earnings before the open on Monday.
The Morgan Stanley strategists continue to favour cyclicals, including financials, industrials and consumer discretionary, citing strong earnings and compressed valuations.
They also see opportunity in quality growth stocks, such as AI cloud service providers, where sentiment and valuations have reset to more attractive levels.
The strategists recommended that investors be ready to add risk, even if the Middle East war continues to raise questions over energy supplies and the path for monetary policy.
“The final phase of a correction is rarely easy and could require another re-test for markets, particularly if rates or bond volatility push higher again,” they added. BLOOMBERG
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