Source: Zhitong Finance
Two of Wall Street's most pessimistic strategists said that if corporate profits disappoint, the rebound that drove the US stock market to a new record this year will come to a standstill.
Although the S&P 500 index has repeatedly reached new highs, profit prospects have been weakening, and Morgan Stanley and J.P. Morgan Chase are increasingly worried about this. Morgan Stanley's Michael Wilson said that the rise in the stock market over the past five months was driven by more relaxed financial conditions and higher valuations rather than improvements in fundamentals.
A team led by Wilson wrote in a report: “Further expansion of the price-earnings ratio of US stocks may depend on rising profit expectations. “Considering that profit forecasts for 2024 and 2025 have hardly changed over this period, it is difficult to justify a higher index level valuation based on fundamentals alone.”
According to compiled data, general profit expectations have been lowered in the past five months. Analysts currently expect earnings per share to increase by about 9% this year, lower than the 11% forecast in early November last year. However, although profit expectations have been declining, the US stock market continued to rise due to optimism about potential interest rate cuts and the development of artificial intelligence, and the better-than-expected fourth quarter earnings season also helped.
J.P. Morgan's Mislav Matejka is also concerned about the disconnect between earnings expectations and stock prices.
A team led by Matejka wrote in a report: “We are concerned that profit growth may slow down for a number of reasons. If profit acceleration is not achieved, this could be a limiting factor.”
According to reports, Morgan Stanley and J.P. Morgan Chase are among the most pessimistic banks on Wall Street. J.P. Morgan predicts that the S&P 500 will close at 4,200 points by the end of this year, down 20% from the recent closing price, while Wilson expects the index to drop to 4,500 points.
One thing that bearish stock market strategists worry about is that the stock market's recent gains, driven by the “Big Seven,” have narrowed. Wilson wrote that the market needs to expand its scope in order to continue to rebound.
Additionally, Royal Bank of Canada capital market strategist Lori Calvasina pointed out that the excellent performance of the S&P 500 index constituent stocks stagnated after reaching new highs. She wrote, “We still think market sentiment is tense, and believe the US stock market should have pulled back long ago.”