Equity markets still face unresolved risks around trade tensions and slowing earnings revisions, which should keep investors cautious in the near-term, according to Morgan Stanley’s Michael Wilson.
The S&P 500 has yet to recoup losses induced by an escalation in U.S.-China tensions earlier this month.
At the same time, earnings revisions — the number of analysts upgrading versus downgrading estimates — are slowing just as the reporting season gets into full swing. Adding to the jitters are cracks appearing in credit after loan blowups at two regional lenders.
“It’s important to see clearer trade de-escalation from both sides, stability in EPS revisions, and more ample liquidity before declaring the all-clear on the risk of a further near-term correction,” the strategists wrote in a note.
Wilson said last week that U.S. stocks are at risk of sinking as much as 11% if trade tensions between the U.S. and China aren’t resolved before a November deadline.
While he’s cautious in the short term, Wilson said his rolling economic recovery thesis remains intact over the next 6-12 months. The strategist has maintained a bullish view on U.S. stocks this year and was among the few who correctly predicted a robust recovery following April’s tariffs-fueled selloff.
Stock futures edged higher on Monday after comments from U.S. President Donald Trump spurred optimism that the two nations will be able to resolve the latest trade spat. Trump listed rare earths, fentanyl and soybeans as the U.S.’s top issues with China ahead of talks between the two sides.
Concerns over trade and about the wider implications of losses at Zions Bancorp and Western Alliance Bancorp caused a spike in volatility at the end of last week.
The VIX Index remains around the key 20 level, near the top of the range over the past six months. Overall equity positioning tumbled last week in the biggest weekly cut since the tariff-related selloff in April, according to Deutsche Bank AG strategists led by Parag Thatte.
Meanwhile, an earnings revisions index has been losing momentum and is now in negative territory, something that investors need to watch, Wilson wrote. Still, he said the pullback in earnings revisions is in line with seasonal trends and may be a temporary pause ahead of the next leg higher.
With the season now well underway, results are looking promising, according to Oppenheimer Asset Management Chief Investment Strategist John Stoltzfus. The S&P 500 companies that have reported so far have shown 16% profit growth, above estimates for 12% growth, Stoltzfus wrote in a note on Monday.
The fact that big U.S. companies are beating expectations and guidance despite ongoing risks suggests there is “enough resilience to provide stocks with a ticket to ride,” Stoltzfus said.
(Credit: Victor J. Blue/Bloomberg)
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