Morgan Stanley’s Wilson Says Stock Rally Will End if Profits Dip

A rally that’s pushed U.S. stocks to a new record this year will stall if company earnings disappoint, according to two of Wall Street’s most bearish strategists.

Morgan Stanley and JPMorgan Chase & Co. are growing concerned as the outlook for profits has been weakening even as the S&P 500 reaches fresh highs. Equity gains over the past five months have been driven by easier financial conditions and higher valuations rather than improving fundamentals, according to Morgan Stanley’s Michael Wilson.

“Further multiple expansion in the U.S. is likely dependent on an upward inflection in earnings expectations,” a team led by Wilson wrote in a note. “It’s hard to justify the higher index-level valuations based on fundamentals alone, given that 2024 and 2025 earnings forecasts have barely budged over this time period.”

According to data compiled by Bloomberg Intelligence, consensus earnings estimates have been revised lower over the past five months, with analysts currently expecting earnings-per-share to grow about 9% this year versus 11% at the start of November. But while profit estimates have been falling, U.S. stocks have continued to rally amid optimism about potential rate cuts and developments in artificial intelligence, with a stronger-than-expected fourth-quarter results season also helping.

JPMorgan’s Mislav Matejka is also worried about the disconnect between earnings expectations and share prices.

“Our concern is that profit growth could underwhelm, for a number of reasons,” a team led by Matejka wrote in a note. “If the earnings acceleration fails to materialize, this could act as a constraint.”