By Senad Karaahmetovic
While investors are actively discussing the Fed and the upcoming CPI report, Morgan Stanley is telling them that is "yesterday’s news." Instead, investors should pay closer attention to the earnings risk as estimates are "far too high."
Moreover, Morgan Stanley told its clients to focus on the soft/survey macro data because this type of data tends to lead the economic and earnings data.
The broker's top equity strategists reminded investors that the market was ignoring the Fed risk a year ago. Today, it is ignoring the earnings risk "with the equity risk premium at just 225bps for the S&P 500."
"This makes the risk/reward very unattractive given our forecasts on earnings for next year," they wrote to clients over the weekend.
The "disconnect" in pricing the earnings recession also occurred in 2008 when the market was slow to recognize upcoming earnings declines.
The strategists see the S&P 500 plunging to 3000-3300 in the first quarter before recovering. They add that this bear market rally is already running out of steam.
"We find it very challenging to argue for higher valuations at this point, and with our expectation for falling earnings estimates, that leaves little, if any, upside to broader equity markets from here. Bottom line, we think the CPI and Fed actions next week are unlikely to change this picture," they concluded.