Both Morgan Stanley’s Michael J Wilson and Goldman’s David J Kostin expect corporate profit margins to contract next year given unrelenting cost pressures, they wrote in separate notes. According to Wilson, “the best part of the rally is over.”
The forecasts come on the heels of a better-than-feared Q2 earnings season, which sparked a sharp rally in US stocks last month as investors bet that margins could withstand inflationary pressure. Optimism around a dovish tilt in Fed policy amid weaker economic data has also lifted sentiment.
Yet the strategists aren’t so sure. “While prices to the end consumer are still rising, prices for producers are rising at double the pace,” Morgan Stanley’s Wilson said. Analyst expectations of margins expanding into 2023 are “unrealistic due to sticky cost pressures and receding demand.”
Goldman’s Kostin concurs, saying higher input costs will dent profit margins next year even as revenues continue to rise, albeit at a slower pace. The strategist now expects net margins to fall by 25 basis points in 2023, seeing contraction in every sector, led by materials, energy and healthcare.
Morgan Stanley’s Wilson is sceptical of the recent rebound, having called it a “bear market rally” amid growing fears of a recession. While he believes inflation has peaked and “will probably fall faster than the market currently expects,” that still doesn’t bode well for stock markets as it’ll reduce operating leverage and weigh on company earnings, he said.
