Morgan Stanley Cautions: Trade Tensions and Slowing Earnings Revisions Pose Short-Term Risks for Stock Market

TradingKey - Morgan Stanley recently reported that the stock market continues to face risks from trade tensions and a slowdown in earnings revisions. Investors are advised to remain cautious in the short term.

Earlier this month, the S&P 500 Index declined due to escalating trade tensions and has yet to recover those losses. This coincides with the onset of earnings season, where the pace of earnings revisions—reflecting the ratio of analysts upgrading to downgrading forecasts—is slowing. Last week, two regional banks experienced loan defaults, further unsettling the credit market.

Morgan Stanley strategist Michael Wilson stated that before declaring the threat of a short-term pullback completely over, clearer signs of easing US-China trade tensions, stabilization in earnings per share forecasts, and greater liquidity in the stock market are necessary.

Wilson's forecast from last week suggests that if the US-China trade dispute is not resolved by the November deadline, US stocks could face an 8%-11% decline, potentially dropping to between 5800 and 6027 points.

On Sunday, President Trump remarked that a 100% tariff on China is "unsustainable" and claimed a good relationship with the Chinese leader. Both parties are expected to discuss this matter at the APEC summit in South Korea later this month, partially alleviating market concerns over the trade dispute.

Dennis Debusschere, Chief Market Strategist at 22V Research, noted that tensions could ease if Trump and Xi meet at the end of the month. However, the absence of this meeting would significantly increase the likelihood of escalation.

Regarding the newly commenced earnings season, Wilson highlighted that the earnings revision index is losing momentum and currently sits in negative territory. Nonetheless, he believes this aligns with seasonal trends, suggesting this dip might be a temporary pause before the next upward movement.

While Wilson takes a cautious stance on US stocks in the short term, he maintains confidence in his "rolling economic recovery thesis" over the next 6-12 months. Notably, he has been optimistic about US stocks and was among the few analysts who accurately predicted a strong recovery following the tariff-driven selloff in April.

John Stoltzfus, Chief Investment Strategist at Oppenheimer Asset Management, is optimistic about US stocks' performance in Q3. In his report, he noted that S&P 500 companies that have reported so far in Q3 show an average profit growth of 16%, exceeding the expected 12%, indicating that large American companies remain resilient, providing upward momentum for US stocks.