Pessimistic Morgan Stanley: Sudden drop in profits will strangle US stock rebound, European stocks may fall more than 10% this summer.

Morgan Stanley warns that US corporate profits will plummet by 16%, and the rise of US stocks will soon be put on the brakes. European stocks, which have shown strong resilience this year, will also experience adjustments in the second half of the year due to the slowdown in European economic growth.

On June 5th, Morgan Stanley's chief stock analyst Graham Secker and others released a report stating that US stocks may fall nearly 10% to 3,900 points by the end of this year, while European stocks will fall more than 10% this summer.

In contrast to the European and American stock markets, Morgan Stanley believes that Asian markets such as Japan and South Korea still have room for growth in stocks and recommends increasing holdings of government bonds and the US dollar in developed markets.

Since the beginning of this year, the Japanese and South Korean stock markets have entered bull markets one after another, with the Nikkei 225 index cumulatively rising more than 25%, reaching a historical high of 32,000 points; the South Korean KOSPI index has cumulatively risen more than 17%; the European Stoxx600 index has risen nearly 8%, which is less than the nearly 12% increase of the S&P 500.

US corporate profits will begin to plummet

The report believes that corporate profits will begin to plummet, and earnings per share of S&P 500 index constituent companies will drop sharply by 16% this year.

This has also become one of the most pessimistic expectations of major Wall Street investment banks tracked by Bloomberg, forming a sharp contrast with Goldman Sachs' optimistic forecast. A report recently released by Goldman Sachs predicts that earnings of S&P 500 constituent companies will grow moderately.

Morgan Stanley believes that the deteriorating liquidity background may bring downward pressure on stock valuations in the next three months. At the same time, with the further slowdown of corporate revenue growth and profit margins, it is expected that earnings per share of companies will also be disappointing.

Wall Street News has analyzed in multiple articles before that in order to enrich the TGA account, the Ministry of Finance will soon issue a large amount of bonds. Major Wall Street banks have warned of the impact of massive US bond issuance on liquidity, stocks, and bonds.

Morgan Stanley predicts that the average earnings per share of S&P 500 constituent companies is $185, while the median forecast of other investment banks is $206.

Morgan Stanley predicts that the S&P 500 will fall to 3,900 points by the end of the year, which is nearly 10% lower than the closing price of 4,282.37 points last Friday. The estimated median drop in the S&P 500 index within two months after such a large-scale liquidity tightening may reach 5.4%, according to Huacai Bank.

Will European stocks be worse off than US stocks?

Morgan Stanley believes that due to the negative impact of the slowdown in economic growth and the deterioration of liquidity on corporate earnings, European stocks may fall 10% this summer.

Considering that investors tend to hold defensive stocks rather than cyclical stocks, we have downgraded the rating of European financial industry stocks to "neutral" and upgraded the rating of pharmaceutical industry stocks by one level to "buy".

Morgan Stanley stated that the rise of European stocks since 2023 has been among the top in the world, but the decline in European corporate profit margins combined with the weakness of the European economy will lead to a downturn in European stocks starting in the second half of 2023:

We believe that this is the beginning of the weakness of the European economy, and the adjustment cycle of the European stock market began later than expected, which limits the potential rebound of European stocks in 2024.

While the European Central Bank is still continuing its aggressive interest rate hikes, the European stock market is facing pressure and is lagging behind the 12% increase in the S&P 500 index since the beginning of this year.

Now the market generally believes that although inflation in the eurozone has fallen sharply, it will not prevent the European Central Bank from continuing to raise interest rates at its policy meeting in 10 days.

Secker said that financial stocks have been driving Europe's outstanding profit performance this year, but there is limited room for further gains in financial stocks, and the rise of European stocks may have come to an end.