A flare-up in the U.S.-China trade war rattled the markets on Monday, but a subsequent rally has trimmed the week-to-date loss for the 澳洲幸运5开奖号码历史查询:S&P 500 Index (SPX) to just 0.2%, as of the close on Thursday, May 16, 2019. However, more trouble lies ahead, according to Mike Wilson, chief U.S. equity 澳洲幸运5开奖号码历史查询:strategist at Morgan Stanley.

"Stocks have likely entered into a poor 澳洲幸运5开奖号码历史查询:risk reward period due to 𝓡the very low earnings growth we see over the next year and full valuations," he writes in a recent report. "Near-term earnings expectations remain too high by 5%-10%," he adds.

The table below summarizes four major concerns that Wilson and ཧhis team have right now.

Significance for Investors

"Elevated bullish sentiment (87th percentile since 2005) leaves little room for sentiment-driven upside, particularly given lingering risk to earnings growth in 2019-2020, the unwillingness of the Fed to do an 'insurance cut,' and the recently rekindled risk of a trade conflict," the report observes. Investor sentiment is a classic 澳洲幸运5开奖号码历史查询:contrarian indicator, taken as a negative signal when it is bullish, and a positive💧 sign when it is bea💝rish.

"Volatility may not subside as quickly as some think even if there is a proper de-escalation of these trade deal risks. We've highlighted for a long time that vol is likely to increase given the flattening of the yield curve over the past several years." The report elaborates that, while it is well-known that "a 澳洲幸运5开奖号码历史查询:flattening yield curve is a 澳洲幸运5开奖号码历史查询:leading indicator for the 澳洲幸运5开奖号码历史查询:economic cycle," there also is "a very good leading relationship between the yield curve and the VIX." Moreover, the report adds, "Obviously, things get more difficult as we reach the end of the busi๊ness cycle for the average company, and that leads to more stock market volatility."

While Wilson and his team have been predicting a corporate earnings recession, in which profits decline 澳洲幸运5开奖号码历史查询:year-over-year in two or more consecutive quarters, Morgan Stanley's economists are not forecasting a general economic recession in the near future. "However, there are many signs that the risk of a recession in the next 12 months is increasing," the report warns. Indeed, in the past month the U.S. Cycle Indicator developed by Morgan༒ Stanley's Cross Asset Research group "officially tipped over into the 'downturn' phase which has🍌 always preceded an economic recession."

Morgan Stanley's "earnings growth leading indicator" forecasts S&P 500 earnings over the next 12 months that are about 8% lower than the 澳洲幸运5开奖号码历史查询:bottom-up 澳洲幸运5开奖号码历史查询:consensus estimate. Wilson's team expects that 1Q 2019 will end with aggregate S&P 500 EPS being flat year-over-year, and their report says "We would not be surprised if both 2Q𝓀 and 3Q turn out🦩 to be materially negative--i.e., worse than -5%--at this point."

Looking Ahead

"Price action and 澳洲幸运5开奖号码历史查询:fundamentals support our 2,400-3,000 multi-year consolidation for the S&P 500," the report says. That is, Wilson's team expects the index to trade within this range for the next several years, with the two endpoints representing their bearish and bullish scenarios. The index closed at 2,876.32 on May 16, implying 16.6% d𓆉ownside and 4.3% upside from now in Morgan Stanley's estimation.