2022 – Snap’s earnings warning shocked stock investors this week. Morgan Stanley explains why more is emerging that could send markets down 10%

Morgan Stanley said Wall Street shares could fall further thanks to the earnings shock.

  • Lisa Chalet of Morgan Stanley said the recent decline in sales to technicians and retailers is worrying investors.
  • Snap’s earnings warning this week rocked stock markets as the CEO outlined adverse conditions for companies.
  • The investment chief said further profit cuts are likely and could push already battered markets down another 5-10%.

A series of notable earnings declines from technology and retail leaders suggests it’s time to recoup stocks buoyed by pandemic-era stimulus โ€” and that could send markets lower, according to Morgan Stanley’s Lisa Chalett.

As companies face new headwinds, Shalit said in a note this week, investors can expect a shock from rapidly deteriorating earnings revisions.

“The market narrative has shifted from concerns about the Fed’s ability to make a soft landing and tame inflation to concerns about corporate earnings and the risk of a recession,” she said.

“Indeed, some corporate earnings failure over the past week has shed light on rising costs affecting corporate profits and weakening consumer demand,” she wrote.

The Wealth Management CIO’s comments come within a week as Snap’s earnings forecast cut hit the stock market, helping to cause losses not just in technology but across the board.

Shares of parent company Snapchat fell as much as 38% on Tuesday, while shares of Facebook affiliate Meta fell 9% and Twitter 2%.

The Snap CEO warned that โ€œthe macroeconomic environment continues to deteriorate in 2022, faster than expected,โ€ which will hurt employment and revenue growth for the social media platform for the remainder of the year.

Companies such as WalmartTarget, Amazon and Google’s parent company Alphabet have pointed to similar pressures in recent updates as they warn of lost earnings and profit targets.

Shalit noted that corporate profits rose dramatically in 2020 and 2021, spurred by a record government stimulus that skewed consumer demand toward goods and “winners at home” in the early days of the pandemic.

Federal monetary tightening and slower economic growth hampered these trends as the central bank aggressively raised interest rates to tame severe inflation.

“It seems inevitable that there will be some corporate profit return this year,” Shalit said.

โ€œIf the fiscal stimulus ends, consumers spend more on services at the expense of goods, and inflation affects business spending, profits will be hit.โ€

Morgan Stanley warned that even the biggest tech giants are unlikely to be immune to the triple threat of tighter policies, higher inflation and a stronger dollar.

โ€œWith the notable shortfall in profits last week in the retail and technology sectors due to overstocking, high costs and destruction of demand due to price, the next phase of inventory reclassification has begun,โ€ Shalit said.

According to Morgan Stanley, the US 75-day earnings reviews were the worst of any market, including European, Asia-Pacific and emerging markets.

Stocks tumbled in 2022 as investors worried about the Fed’s monetary tightening, the risk of an economic slowdown, rising inflation and the fallout from the Ukraine war.

The tech-heavy Nasdaq is the biggest loser, down about 25%, the S&P 500 is down about 15% and exercising bearish territory, and the Dow Jones is down more than 10% year-to-date.

With a possible recession looming on the horizon, Shalit said the earnings revision shock could push US stock markets further lower.

“Ultimately, we estimate that stock market indices could suffer another 5% to 10% from this earnings update,” she said.

Morgan Stanley’s chief investment officer recommended using market volatility to move portfolios toward maximum diversification, quality factors and active management. It recommended investing the liquidity in investment grade bonds, non-US equity funds, and cyclical funds such as financial, energy and industry.

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