Morgan Stanley Expects 16% Drop In S&P 500 Earnings: Here's What The Investment Bank Is Bullish On

Morgan Stanley has reportedly estimated a 16% drop in the earnings per share of S&P 500 this year that is expected to apply brakes on the rally seen so far.

Strategists at the investment bank led by Andrew Sheets expect that S&P 500 earnings per share will come in at $185 versus a median $206 prediction from strategists, according to a Bloomberg report.

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"We think that the downside risk to US earnings is now," the analysts wrote in a note published Sunday. "While a deteriorating liquidity backdrop is likely to put downward pressure on equity valuations over the next three months, we also see EPS disappointment ahead as revenue growth slows and margins contract further."

Sheets' team expects the S&P 500 at 3,900 at year-end compared to Friday's close at 4,282.37. The index is on the cusp of a bull market after a 19.7% rally from an October low, led by enthusiasm for artificial intelligence stocks aggressive rate hikes by the Federal Reserve and concerns about a potential recession.

The SPDR S&P 500 ETF Trust SPY closed 1.45% higher on Friday while the Invesco QQQ Trust Series 1 QQQ gained 0.75%.

Bullish Takes: Morgan Stanley is bullish on equities in Japan, Taiwan and South Korea and recommends an overweight position in developed-market government bonds that include long-dated Treasuries and the dollar, according to the report. Last week, Japan's Nikkei had hit a 33-year high led by optimism over the U.S. debt ceiling deal and a weak yen.

The iShares 20 Plus Year Treasury Bond ETF TLT has gained over 1.87% in the last five days while the SPDR Portfolio Long Term Treasury ETF SPTL rose 1.88% during the period, according to Benzinga Pro.

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