Morgan Stanley analyst breaks down the ‘fire and ice’ recession indicators – Yahoo Finance

As the earnings season gets underway, all eyes are on companies’ performance as markets will be gauging how big names across various sectors have been navigating inflation, rising interest rates, and the Russia-Ukraine war. According to Morgan Stanley (MS) Chief U.S. Equity Strategist and CIO Mike Wilson, there are two things that investors should focus on during this critical earnings season.

“It’s really about, I think, two things. Number one, what did the companies guide to for 2Q and the rest of the year? I think that will be a real mixed bag,” Wilson told Yahoo Finance Live. “We have some strong views that … consumer goods companies probably have to lower the bar a bit for obvious reasons. Maybe the services companies could see something tick up. Those are two pretty good examples of differences on the guidance.”

The corporate logo of financial firm Morgan Stanley is pictured on the company's world headquarters in the Manhattan borough of New York City, January 20, 2015. Wall Street investment bank Morgan Stanley said it would pay a smaller portion of revenue in bonuses to its bankers and traders this year even in a better revenue environment. The bank reported a drop in fourth-quarter adjusted earnings, missing estimates, as it deferred fewer bonus payouts and unexpected market swings hit its division that trades bonds, currencies and commodities. REUTERS/Mike Segar (UNITED STATES - Tags: BUSINESS LOGO)The corporate logo of financial firm Morgan Stanley is pictured on the company's world headquarters in the Manhattan borough of New York City, January 20, 2015. Wall Street investment bank Morgan Stanley said it would pay a smaller portion of revenue in bonuses to its bankers and traders this year even in a better revenue environment. The bank reported a drop in fourth-quarter adjusted earnings, missing estimates, as it deferred fewer bonus payouts and unexpected market swings hit its division that trades bonds, currencies and commodities. REUTERS/Mike Segar (UNITED STATES - Tags: BUSINESS LOGO)

The corporate logo of financial firm Morgan Stanley is pictured on the company’s world headquarters in the Manhattan borough of New York City, January 20, 2015. Wall Street investment bank Morgan Stanley said it would pay a smaller portion of revenue in bonuses to its bankers and traders this year even in a better revenue environment. The bank reported a drop in fourth-quarter adjusted earnings, missing estimates, as it deferred fewer bonus payouts and unexpected market swings hit its division that trades bonds, currencies and commodities. REUTERS/Mike Segar (UNITED STATES – Tags: BUSINESS LOGO)

The second thing investors should keep their eyes on, Wilson said, is how stocks react to positive news. He and Morgan Stanley believe that companies are now peaking in terms of margins and profitability.

“But then I think the other thing that we have to really watch is, how does the stock trade even on good news? Because it’s our view that this is pretty much as good as it gets, right? That the margins now are going to deteriorate,” he added.

Wilson joined Yahoo Finance Live to discuss earnings season, tech stocks, inflation, growth, and the outlook for the economy. His thesis that earnings will only go downhill from here echoes that of other strategists who predict that the Federal Reserve’s rate hike campaign to quell inflation will bring forth a significant slowdown in growth. Other experts see inflation peaking concurrently this earnings season as the Fed battles surging prices.

For now, however, Wilson believes it will be difficult for companies not to beat a bar that has already been lowered throughout Q1 2022 in light of unexpected market turbulence such as geopolitical risks.

“I think the first quarter itself will be fine,” he said. “I mean, companies do a really good job of managing the quarter that we’re in. So there’s no reason to think that we’re not going to see companies beat what has been a lowered bar. So one thing I would point out is that earnings did come down over the course of the quarter, earnings estimates for the first quarter, and now companies will likely beat that.”

But while companies are benefiting from strong demand — consumers are spending despite facing record levels of inflation — the S&P 500 (^GSPC) continues to grapple with supply-side pressures as costs pick up. In any case, Wilson says it’s too early to say whether or not this will be the last quarter of earnings growth for the S&P.

“But I do think earnings growth is going to decelerate further from what is being modeled,” he said. “The problem is that the rest of the year, [The Street has] the margins going back up. So I think that will come in. You could still get positive growth. But it’s going to be low single digits, maybe mid-single digits at best. And that doesn’t justify 19 times earnings in our view.”

Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV

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