- Morgan Stanley lays out a grim forecast for the US if trade
negotiations between the world’s two-largest economies turn
- The firm also identified the market sectors with the biggest
exposure to increasing input costs, and how passing the buck onto
consumers will be detrimental to demand.
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The US’ ongoing trade war with China has experienced wild twists
and turns, causing shifts in market sentiment at a moment’s notice.
That’s made it hard to drown out the noise in order to get to the
numbers that matter most.
Morgan Stanley’s latest work has cut through the market’s
nebulous hue, calculating the economic, equity-market, and
earnings-growth implications of
President Donald Trump’s trade war.
And the firm isn’t exactly sugar-coating its latest round of
forecasts. It’s weighed recent developments in the trade war and
arrived at a stark bear case that should have investors everywhere
Here’s a summary at Morgan Stanley’s bear-case projections:
- S&P 500 falls 16% to 2,400 over the next 6-12 months
- Earnings growth bottoms out in 2021 at -14%
- A full-blown economic recession hits in 2020
In broad strokes, Morgan Stanley argues that if the world’s two
largest economies can’t come to a viable agreement, then the US
faces a real chance of a recession in the near future.
And although all areas of the market are susceptible to an
economic downturn, some sections are much more exposed than
others. The chart below — which reflects mentions of the word
“tariff” on company earnings calls — serves as a handy guide for
which sectors are bracing most for the resulting earnings pain.
technology, and consumer discretionary companies account for
more than half of the “tariff” mentions above, and for good reason
— they are all extremely vulnerable to increases in input costs,
and supply-chain disruptions.
“An already slowing economy and clear negative operating
leverage mean that it is harder to pass along costs than companies
expect without instigating demand destruction, and that margin
efficiencies are already in short supply,” the Morgan Stanley
This is a problem not only for investors overly exposed to these
sectors, but also for the market as a whole. Selloffs tend to be
fast-moving and nondiscriminatory, so it’s reasonable to believe
that trouble brewing in a few portions of the market may spread to
others through contagion.
Couple this notion with
corporate debt levels nearing record highs, weakness in the
labor market, and geopolitical uncertainty, and you have a recipe
for a swift drawdown capable of upending the 10-year bull
It’s important to bear in mind that the projections above are
only applicable if no deal is reached, 25% tariffs are slapped on
all remaining Chinese imports, and China retaliates with
countermeasures of its own — something investors are desperately
trying to avoid.
As of today, Morgan Stanley is allotting a 20% probability of
the bear-case coming to fruition, so the likelihood of a full blown
recession isn’t necessarily likely. Still, the firm is stressing
“We would advise a cautious approach to companies with material
cost exposure to Chinese imports that downplay the potential
impacts,” said the strategists.