Stock market may be in for a rude awakening as earnings growth hits a wall, warns strategist

Blockbuster earnings, which until now have played a pivotal role in fueling the stock market’s multiyear over the past few years, could be a distant memory as corporate profits hit a wall.

Mike Wilson, chief equity strategist at Morgan Stanley, on Monday downgraded S&P 500’s earnings-per-share growth target for the year to 1% from 4.3% and warned of a looming earnings recession.

“Our earnings recession call is playing out even faster than we expected,” said Wilson in a report. “When we made our call for a greater than 50% chance of an earnings recession this year, we thought it might take a bit longer for the evidence to build.”

The strategist, whose views on the stock market are among the more subdued in the industry, believes the odds of a contraction in corporation’s bottom line are rising with the possibility of flat earnings in the first half and a “hockey stick” for the second half.

One doesn’t have to look far for clues on where the corporate sector’s performance is headed. Fourth-quarter earnings season, which is in the process of winding down, alone attests to the strategist’s lukewarm outlook.

As of Feb. 8, with 66% of S&P 500 SPX, +0.07%  components having announced results, fourth-quarter earnings rose 13.3%. If this holds, it will be the first quarter that the index has not posted an increase of 20%, according to John Butters, senior earnings analyst at FactSet Research.

For the current quarter, U.S. companies are projected to report an earnings contraction of 4.1%, based on analysts’ median estimates in January. That is significantly deeper than the average 1.7% decline over the past 15 years, Butters said.

Things could improve toward the latter part of 2019 with analysts predicting earnings growth to accelerate to about 9.5% in the fourth quarter versus roughly

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