Morgan Stanley’s Wilson Sees Drop in Near-Term Profit Views

US company earnings are likely to weaken in the fourth quarter before a rebound in 2024, according to Morgan Stanley’s Michael Wilson.

The strategist highlighted a “steep downward revision” to consensus fourth-quarter estimates and added that he is less optimistic than other strategists about the magnitude of margin expansion next year. “We see earnings risk persisting in the near term before a broader recovery takes hold as next year evolves,” he wrote Monday in a note to clients.

The strategist has been negative on stocks for most of the year even as markets rallied alongside economic resilience and expectations that the Federal Reserve has completed its interest rate-hiking cycle. He said in October that a year-end rally was unlikely, but the S&P 500 Index has gained about 11% since then.

Wilson told Bloomberg Television on Monday that monetary policy and fiscal spending are likely to normalize in 2024, but not until the second half of the year. Until then, “it’s going to be very challenging for us to see an acceleration of growth,” he said.

Against that backdrop, Wilson said quality and large-cap defensive stocks are likely to continue to outperform until the current market cycle ends, either with a hard landing or “some new exogenous shock or driver for positive growth.”

Only then can investors expect a broader and more sustainable stock rally, according to Wilson, who called a no-landing scenario a “fantasy.”

Morgan Stanley Keeps Bearish Call