Morgan Stanley's Mike Wilson cautious on outlook for S&P 500 earnings

Morgan Stanley strategist Mike Wilson cautioned clients that large-cap stock market indices were exposed to the risk of sudden falls as seen in the regional bank index and in small caps.

According to Wilson, the latest figures showed that a credit crunch had already begun, revealing the biggest two-week drop on record in lending by banks.

He also highlighted the results of the latest survey from the National Federation of Independent Business, which had shown the largest fall in the availability of credit for 20 years.

Furthermore, while the failures of SIVB and SBNY seemed predictable in hindsight, "most did not see the failures coming, which leads to the question of what other surprises may be coming from the most abrupt monetary policy adjustment in history?," he mused.

And yet the S&P 500 and Nasdaq had traded well since those failures.

He attributed that "mostly" to their defensive high-quality characteristics and lower back-end rates, but given the continued deterioration in the growth outlook, that should be taken as a signal that "all is well".

Wilson also believed that the decline in the year-on-year rate of decline in the bottom-up consensus for growth in the S&P 500's earnings per share of about 9% per annum was not severe enough for investors to ask for a higher equity risk premium, as he believed they ought to.

Investors were also taking comfort in the fact that earnings forecasts were implying a trough in the annual rate of increase in S&P EPS - "a key buy signal that we would normally embrace – if we believed it."

"To those investors cheering the softer-than-expected inflation data last week, we would say be careful what you wish for.

"Falling inflation last week, especially for goods, is a sign of waning demand, and inflation is the one thing holding up revenue growth for many businesses."