By Senad Karaahmetovic
Morgan Stanley’s top US equity strategist, Michael Wilson, has continued to urge investors to stay defensively positioned despite a counter-trend rally, which may continue to take place.
The strategist believes that it is “premature” to exit defensives, at least until “either a recession is confirmed or the risk of one is extinguished.”
“With profit growth likely to fall sharply over the next several quarters, the risk of a labor cycle is increasing, in our view, and this is the only metric that we think matters for whether we enter a recession or not,” Wilson told clients in a note.
He also noted that most investors still don’t own defensives, which leaves more upside potential in these sectors “as earnings cuts begin.”
“Consensus is calling for strong top line growth, but margin headwinds--change in net margin is expected to be negative Y/Y and detract from overall EPS growth. That said, this margin pressure dynamic is expected to be short-lived, and margins are expected to contribute positively to EPS growth post 2Q (out to YE ’23). We’re skeptical on this front given the myriad of cost pressures companies are facing, coupled with decelerating demand risk,” Wilson added.
The strategist also reminded clients that the earnings revisions breadth is in negative territory, a key reason why he believes that EPS estimates are too high.
“This move to the downside in revisions breadth has accelerated in the last week, and the measure is now at the lowest level since July 2020,” Wilson concluded.