Morgan Stanley’s Shalett Says Analysts Are ‘Deer in Headlights’

Wall Street analysts are sticking with their bullish earnings forecasts for this quarter, and Morgan Stanley’s Lisa Shalett says they need a reality check.

“Economists have begun to cut their top-down economic forecasts for GDP, and yet fundamental company analysts are sitting there like deer in headlights not knowing what to do with numbers,” the Morgan Stanley Wealth Management chief investment officer said on Bloomberg TV Monday. “We just don’t see how we don’t get a recalibration here from the analysts that take the E in P/Es down.”

While investors are familiar with optimistic projections from Wall Street, analysts have further increased 2022 forecasts over the past month. Data from Bloomberg Intelligence show they expect companies in the S&P 500 to see profits grow by 10.7%, up from 10% a month ago and 8.7% at the start of the year.

Shalett and other strategists find this far-fetched, given the unprecedented confluence of factors -- from aggressive Federal Reserve rate hikes to looming recession fears -- weighing on the market this year.

“Analysts are still in fantasy land in terms of the earnings outlook, so that’s an adjustment that needs to happen in one of two ways -- either the analysts get more realistic and start to revise earnings down, which will be its own negative-sentiment event for investors, or reality bites and the second or third-quarter earnings come out and you have more disappointments than upside surprises,” David Donabedian, chief investment officer of CIBC Private Wealth Management, said in a phone interview. “And that’s obviously not going to be well-received in the market.”

The S&P 500 Index has tumbled about 18% this year amid building recession worries as the Fed boosted borrowing costs to combat inflation.