Morgan Stanley's Michael Wilson predicts a decline in US corporate earnings will reduce equity linked to the economy as metrics measuring the ratio of profit growth on downgrades have weakened.
He added that the market is also potentially focused on the notion that falling inflation may prove to be an obstacle to a cycle that is highly dependent on prices.
Gains in US equities have been stymied since the S&P 500 hit a record high in mid-July amid concerns that a slowing economy will prompt the (Fed) to cut interest rates faster and more sharply than expected.
Since the end of June 2024, Citigroup's earnings aggregate shows that downgrades have outweighed drastic upgrades while the defensive sector has outperformed cyclical equities in the S&P 500 since April 2024.
The recent sell-off has impacted tech stocks following investors who are more interested in picking smaller, more affordable equities, Wilson further commented, adding that he will continue to support large-cap equities.
Wilson also thinks the risk or reward is better in small caps are growth equities that should benefit from a cost of capital standpoint when the Fed cuts interest rates that many have been waiting for.
According to Lori Calvasina, strategist at RBC Capital Markets, the current earnings review trend does not yet indicate further rotation in market leadership.
