(Bloomberg) -- The positive effects from inflation on earnings growth for U.S. firms have peaked as rising costs trim their margins and price pressures caused by the Ukraine war hit consumers, according to Morgan Stanley strategists.
“Margin expectations look overly optimistic for the balance of ‘22 given the myriad of cost pressures companies face,” the strategists led by Michael Wilson wrote in a note published today. Meanwhile, the Ukraine conflict “has led to a spike in energy and food costs which serve as nothing more than a tax on a consumer that is already struggling with high inflation.”
U.S. consumer prices rose in March by the most since late 1981, ramping up the pressure on the Federal Reserve to raise rates. At the same time, investors are growing concerned that the response to inflation from an increasingly hawkish Fed could hurt growth, or even lead to a recession.
Chair Jerome Powell may reinforce bets that the Fed will raise interest rates by a half point next month when he makes final public remarks before the U.S. central bank’s pre-meeting quiet period. The Fed chair will speak at an event on Thursday and later that day take part in a panel hosted by the International Monetary Fund.
“We think the positive effects of inflation on earnings growth have reached their peak and are now more likely to be a headwind to growth, particularly as inflation forces the Fed to remain max hawkish,” the Morgan Stanley strategists wrote.
U.S. stock benchmarks have slumped this year as fears of soaring prices, a slowdown in growth and the war in Ukraine weigh on sentiment.
The strategists said the S&P 500 could fall to 4,000 points -- an 8.9% decline from Thursday’s close -- if there’s a fall to similar levels of earnings revisions as those seen during the 2015-2016 U.S. growth slowdown.
“Growth is slowing and likely more than most forecasts incorporate, especially for 2023 when the risk of recession has increased the most,” they wrote.
©2022 Bloomberg L.P.