Morgan Stanley Strategist Warns S&P 500 May Fall Below Previous Lows Amid Earnings Revisions

Morgan Stanley's strategist Michael Wilson has warned that the S&P 500 index could potentially fall below its previous lows due to a storm of earnings revisions. This warning comes as analysts are significantly lowering their earnings expectations for U.S. companies amid growing concerns about a severe economic slowdown.

Wilson noted that the current level of earnings revisions for the S&P 500 index is at an unusually high level, approaching the lower extreme without an actual recession. He highlighted that the uncertainty facing corporations is greater than at any point since the early days of the pandemic, which is putting pressure on earnings revisions.

Analysts have already made substantial cuts to their earnings forecasts. The first-quarter earnings growth forecast for the S&P 500 index has been reduced from an initial 11.4% at the start of the year to 6.9%. This significant downward revision underscores the growing pessimism among analysts regarding the economic outlook.

Wilson pointed out that the earnings revision cycle peaked nearly a year ago, well before the S&P 500 index hit its latest record high. This observation supports his view that the current revision cycle is more severe than market participants generally anticipate. He suggested that investors should focus on sectors and stocks that have already priced in the impact of a mild recession, even if the broader market has not yet done so.

In summary, Wilson believes that if a recession can be avoided, the market may have already hit its low point two weeks ago. However, if a recession materializes, the S&P 500 index is likely to break through these low points. He expects the S&P 500 to remain within a range of 5000 to 5500 points until key economic data, particularly the employment report, confirms or refutes the risk of a recession. The index closed last Friday around 5280 points, near the midpoint of this range.

U.S. stocks have been under pressure this year due to concerns that President Trump's proposed tariff policies could harm the economy and drive up inflation. The current earnings season has failed to boost market sentiment, and investors are increasingly looking for opportunities abroad. The MSCI Developed Markets Index, excluding the U.S., has risen more than 6% year-to-date, while the S&P 500 has fallen by 10%.

Wilson also noted that earnings revisions in other global markets are accelerating in line with those in the U.S., with Europe and China leading the way. He suggested that even within a declining market, U.S. stocks could regain their relative performance advantage over European stocks.