Wall Street Big Short: There may be a worse earnings season!

Wall Street "Big Short" - Morgan Stanley strategist Michael Wilson warns that as we enter this earnings season, the stock market is surprisingly good, but this may bring short-term risks to the stock market.

The worst earnings season may not have come yet

Wilson said that given the pessimistic outlook for corporate profit growth and the Fed's monetary policy, the US stock market unexpectedly got off to a good start in the first quarter earnings season, but this poses a short-term obstacle to the stock market.

In the past year, profit forecasts for US listed companies have been steadily declining, and the expected earnings per share (EPS) for the S&P 500 index is generally not expected to grow until 2023.

FactSet shows that Wall Street analysts expect earnings per share of S&P 500 index component companies to decline by 6.7% in the first quarter ending March 31, 5% in the second quarter, and moderate growth in profits in the second half of 2023.

"Investors are not willing to sell stocks when first-quarter results are announced, which is not surprising because they think this is the worst case. If we believe in consensus forecasts, we will agree with this conclusion," the strategist wrote. "Unfortunately, our forecast is more pessimistic, and we expect the bottom of the earnings per share growth rate to appear in the third or fourth quarter."

The Fed has stabilized

At the same time, Wilson and his team believe that the overall market is supported by the Fed and the Federal Deposit Insurance Corporation (FDIC) increasing liquidity after the collapse of Silicon Valley Bank.

"It provides some boost to the S&P 500 index, which would not have been possible without these emergency actions."

However, although the containment of regional banking industry pressure is a positive catalyst for pushing the stock market higher, it also indicates that the Fed does not need to further relax monetary policy.

"When the market realizes that the Fed's policy is not loose enough to make up for the background of slowing growth, it often re-prices in the later stages of the cycle."

Historically, when the forward earnings per share growth rate is negative, the Fed is cutting interest rates, not raising them.

However, the Fed's tightening cycle occurred at the same time as high and persistent inflation, making this cycle a historical anomaly in this regard-"In our opinion, it will eventually become a short-term headwind for the stock market before the loose cycle begins," Wilson said.