- Major US indices sink for the fourth day in a row as analysts eye two key indicators.
- The biggest risk to stocks is not the Federal Reserve, but earnings, according to Morgan Stanley.
- “We are entering the weakest seasonal time of the year for earnings revisions, with inflation further eating into margins and demand,” the bank’s strategists added.
- There are two indicators that they focused on: the difference between sales growth and the producer price index exchange rate and the difference between nominal GDP growth and wage growth.
For the fourth consecutive day, stocks are collapsing and indices are approaching one-month lows, after the speech by Jerome Powell, the president of the Fed, last Friday.
As the main indices accumulate losses of between 3 and 4.5% in the last week, investors are wondering if the shares will continue their downward trend.
In this context, Morgan Stanley and Wolfe Research have identified a number of factors that they hope will determine future market movements.
What is the biggest risk?
While the vast majority of experts agree that the biggest danger to stocks is inflation, according to Morgan Stanley it is corporate profits.
“The path for stocks from here will be determined by earnings, where we still see a material decline. As a result, equity investors should accurately focus on this risk, not the Fed, especially now that we enter the weakest seasonal time of the year for earnings revisions, and inflation further eats away at margins and equity. demand”
Morgan Stanley’s Mike Wilson.
The bank highlighted two factors: the difference between sales growth and the producer price index exchange rate and the difference between nominal GDP growth and wage growth.
“Both indicators suggest pressure on margins and risk of future earnings growth”, assured Morgan Stanley.
The key is to watch the consumer
So Wolfe Research believes. “Consumer spending is very likely to determine whether our bearish view of the US economy and markets is ultimately right or dead wrong,” the firm argued.
“Our feeling is that the larger tailwinds are rapidly fading, while the larger headwinds are rapidly strengthening.”
WolfeResearch.
As a result of this, the firm commented that the headwinds are: the negative growth of real income, high inflation, more restricted credit and falling consumer confidence.
“We believe that the Fed tightening has just started to affect the economy and that the next big drop in this bear market will be driven by falling GDP growth expectations and downward revisions to earnings.”
WolfeResearch.
