Morgan Stanley on Earnings
While the S&P 500 has made little headway since early June, the adjustment beneath the surface has been significant. As we have emphasized all year, earnings strength is doing the heavy lifting as higher energy prices and rates pressure valuations. That also makes higher crude—and especially refined product prices—more of an inflation risk than a growth risk given the strength of the business/earnings cycle, in our view ( Exhibit 1 ). EPS revisions breadth continues to improve, led by the higher-quality S&P 500 (25%) versus the Lower quality Russell 2000 (7%) where revisions are lagging. In fact, the recent strength in EPS revisions for the S&P points to a catch up in performance ( Exhibit 2 ). This is classic mid-cycle behavior, in our view. It also lines up nicely with our hotter but shorter cycle framework we introduced during the COVID pandemic.
While the S&P 500 has made little headway since early June, the adjustment beneath the surface has been significant. As we have emphasized all year, earnings strength is doing the heavy lifting as higher energy prices and rates pressure valuations. That also makes higher crude—and especially refined product prices—more of an inflation risk than a growth risk given the strength of the business/earnings cycle, in our view ( Exhibit 1 ). EPS revisions breadth continues to improve, led by the higher-quality S&P 500 (25%) versus the Lower quality Russell 2000 (7%) where revisions are lagging.
In fact, the recent strength in EPS revisions for the S&P points to a catch up in performance ( Exhibit 2 ). This is classic mid-cycle behavior, in our view. It also lines up nicely with our hotter but shorter cycle framework we introduced during the COVID pandemic.