Earnings Forecasts for S&P 500 Slash 20% Amid Recession Fears

Morgan Stanley's Michael Wilson has expressed significant concern over the earnings outlook for American corporations, citing substantial risks of economic slowdown. Analysts are actively revising their earnings forecasts downward, with the breadth of adjustments for S&P 500 index constituents reaching unprecedented levels. This pessimism is driven by heightened uncertainty and the potential for a severe economic downturn, which has led to a broad-based reduction in earnings expectations.

The current economic environment is fraught with risks, including policy uncertainties and the potential for a recession. These factors have contributed to a significant downward revision in earnings estimates, with analysts lowering their projections for the first quarter of the year. The breadth of these adjustments is nearing extreme levels, indicating a widespread pessimism among market participants.

Wilson noted that the breadth of earnings revisions has almost reached its peak, which occurred nearly a year ago. This timing is significantly earlier than the period following the Trump administration's inauguration, when the S&P 500 index hit recent highs. This observation supports Wilson's view that the stock market correction has been deeper than generally perceived. He emphasized that the market may have already bottomed out if a mild recession is factored in, but if a recession is unavoidable, the S&P 500 index could fall below previous lows.

Wilson believes that until the risk of a recession is confirmed or refuted by concrete data, particularly employment reports, the S&P 500 index could fluctuate between 5000 and 5500 points. Last week, the index closed near the midpoint of this range, around 5280 points. The current earnings season has failed to boost market sentiment, with investors increasingly looking for opportunities outside the United States. Year-to-date, the MSCI World Index, excluding the United States, has risen over 6%, while the S&P 500 index has declined by 10%.

Wilson also highlighted that the downward revision of earnings expectations is spreading rapidly to international markets, with Europe showing more pronounced adjustments. He suggested that even in a declining market, the U.S. stock market could outperform European markets. This perspective underscores the complex interplay between global economic risks and market performance, emphasizing the need for cautious investment strategies in the current environment.