Why Morgan Stanley Sees The Market Hitting A Brick Wall Some Time This Year


From Morgan Stanley:

We reiterate our underlying thesis that the market multiple will contract this year as a function of potentially disappointing growth and an unexpected path for inflation. We continue to think that earnings estimates for the first half of the year are achievable, but margin estimates begin to accelerate in the second half and look unrealistic. First quarter GDP has materially disappointed, which puts significant pressure on a rebound in the second quarter and beyond, just as the Fed’s quantitative easing program (QE2) comes to a close at the end of June. We don’t have high confidence in the strength of the recovery at this point, and even if our economists’ GDP estimates are met, we still think margin estimates are overly optimistic. As a result, we expect that earnings and margin shortfalls will prove to be the catalysts for multiple contraction during the second half.