Headwinds for US equities are set to intensify further in March, with faltering earnings and soaring valuations pressuring stocks, according to Morgan Stanley strategists.
“Given our view that the earnings slump is far from over, we believe March is a high-risk month as it will trigger the next downside drivers for stocks,” the analysts wrote in a note on Monday. The latest comments come after strategists led by Michael Wilson ranked first in the Institutional Investor Survey last year after correctly predicting stock sales, according to Bloomberg, and Al Arabiya.net reviewed it.
Wilson said that the fact that analysts have paused to cut their corporate earnings estimates for the next 12 months has stoked some investor optimism. However, bear markets are typically characterized by a flat outlook between quarterly earnings seasons before the downtrend resumes.
“Stocks tend to catch this a month early and trade lower, and this cycle has perfectly illustrated that pattern,” he wrote in his note.
The S&P 500 has fallen for three consecutive weeks amid fears that sticky US inflation increases the possibility of the Federal Reserve increasing interest rates. This came after a 17% rise from its lowest level in October, driven by hopes that the US central bank will soon move away from its hawkish stance.
Noting that the S&P 500 has regained its 200-day moving average, Wilson said, “We think this rally is a bull trap.”
He argues that to confirm a long-term trend change, interest rates and the dollar must fall. But if they move higher instead, technical support should fail quickly.
The strategist previously stated that he expects stocks to decline in the spring, predicting that the S&P 500 will drop as much as 24% to 3,000 points in the first half of this year.
