Lower-than-consensus EPS growth in 2024 – Morgan Stanley (SP500)

Morgan Stanley expects a lower-than-consensus EPS growth for the markets, according to their Equity Sales Global Thoughts, Themes, & Ideas report.

Morgan Stanley’s Equity Strategy team expects a rebound in EPS growth in 2024 of 7% to $229 but remains less optimistic about the magnitude of margin expansion because of earnings risk, compared to consensus, which expects an EPS growth of 11% to $247 by end-of-year 2024.

“Strength in the U.S. has largely been driven by outsized contribution of the ‘Magnificent-7’, leaving this year’s U.S. equity market performance one of the narrowest on record,” according to MS Sales and Trading team.

When it comes to U.S. economics, the MS Research team places a 30% probability of a recession beginning over the next 12 months.

The team also expects disinflation to continue, with core goods deflation next year and a faster deceleration in services the following year.

The MS Research team sees core PCE inflation slowing from 3.5% fourth quarter to fourth quarter in 2023 to 2.4% next year, and to 2.1% in 2025, the report said. “The lagged effect of supply-chain healing throughout 2024 and softer demand due to monetary restraint are the two main forces.”

MS also believes the Fed stopped its tightening cycle at 5.375% at the July FOMC meeting and that it will hold until next June. After June, MS forecasted, there would be a 25-basis-point cut, followed by another in September, and during every meeting after the fourth quarter of 2024.

In addition, MS expects job growth to slow in 2024 after output growth was well above employment and hours in 2023.

“A continued rise in labor force participation in MS Research’s outlook, driven by prime age workers, will ease labor supply shortages and lift the unemployment rate without net job losses,” the team wrote.

“Slower but positive job gains” with upside to the labor force participation rate will drive the unemployment rate higher, they added, “but labor hoarding will put a ceiling on it.”

The unemployment rate is expected to increase from 3.9% in this fourth quarter to 4.1% by 2024’s fourth quarter and 4.3% by 2025’s fourth quarter.