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A Morgan Stanley strategist says the ongoing Q2 earnings season is likely a negative catalyst for equities in the coming weeks.
The strategist is “skeptical” that companies will be able to match consensus expectations of c5.5% earnings growth in Q2, led by strong top-line growth (10-11%).
“We’re skeptical of this optimism amid continued broad cost pressures and decelerating top line, and think it’s just a matter of time before 4Q22 and early 2023 margin estimates are revised lower,” the strategist told clients in a note.
Moreover, the strategist also sees a risk to earnings from the stronger U.S. dollar.
“The dollar’s surge higher amid safe-haven demand and hawkish Fed policy presents a headwind for US earnings. US companies in aggregate generate ~30% of sales abroad. Our math suggests that every percentage point increase in the dollar on a Y/Y basis provides an approximately 0.5ppt hit to S&P 500 EPS growth. Thus, the 16% year-on-year increase we’ve seen in the DXY index would translate into an 8% headwind for S&P 500 EPS growth, all else equal,” the strategist added.
As a result, the strategist echoed a Morgan Stanley Chief Equity Strategist – recent comments that earnings revisions will likely come down over the next few earnings seasons.
Finally, Morgan Stanley strategists listed 5 stocks that should respond positively to their respective earrings results.
These stocks are EastGroup (NYSE:EGP), Eli Lilly (NYSE:LLY), Gaming and Leisure Properties (NASDAQ:GLPI), Instructure Holdings (NYSE:INST), and Marathon Petroleum (NYSE:MPC).
