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Morgan Stanley strategists followed up on their last week’s piece that U.S. stocks could stage a near-term rally given oversold conditions.
They noted that even the “slightest whisper of a potential Fed pivot” was enough for equities to stage a rally with the S&P 500 closing the week 4.7% higher. The strategists now see potential for an extended S&P 500 rally in the coming weeks. In this case, the index could hit 4000-4150 as the 200 weekly moving average provides support near 3600.
“With the back end of the bond market offering real value for the first time since early 2021, rates are poised to come in. Such a move could provide the necessary fuel for the next leg of the tactical rally in stocks until we get full capitulation on 2023 earnings estimates, something we think may take a few more months,” they said in a client note.
On when the “full capitulation” on EPS estimates may take place, they added:
“We’ll likely have to get closer to 4Q reporting season when companies guide on ’23to get the type of capitulatory action in forward EPS needed to drive a price low.”
In the meantime, the downward EPS revisions over the next couple of weeks are unlikely to hurt stocks, the strategists concluded.
