Stock Strategist Shares Market Optimism

Mike Wilson, the chief stock strategist and CIO of Morgan Stanley, is optimistic about the stock market with an improvement in the earnings revisions breadth. Knewz.com has learned that the earnings revisions breadth (ERB) indicator measures the net percentage of analysts raising versus lowering earnings forecasts.

Key Signal Forecasts Bullish Market

The earnings revisions breadth indicator is currently at -10%, showing a significant improvement from -25% in April, when the market was unpredictable due to trade war concerns and sweeping tariffs imposed by President Donald Trump. This V-shaped rebound signals revitalized optimism in the stock market. Furthermore, reports have pointed out that the rebound is being driven by more upward revisions, not merely fewer downgrades, a historically more potent driver of market momentum. Morgan Stanley believes that the indicator will continue to trend upward. More upward revisions are known to result in stronger overall stock market performance, historically leading to a 13% increase in the S&P 500 over 12 months.

Weak Dollar Could Further Boost Indicator

Wilson further said that a weak dollar would further bolster the indicator because American companies that do a lot of business overseas receive a boost in sales when the dollar is weak. “Once earnings revisions breadth turns positive, investors should expect forward EPS predictions to trend higher,” reports have explained.

Morgan Stanley’s Advice

The bank suggests that investors should pay more attention to what is coming next, instead of focusing on old data. Wilson says that the most important thing right now is the fact that more experts are starting to believe companies will make more money in the future. Now that things are improving, the bank believes this change in outlook, with more experts raising their predictions, is what will push stock prices higher from now on. The stock market hit a low point in April as many experts were lowering their earnings guesses due to economic uncertainties. However, the bank sees this as the end of a year-long trend of downward earnings revisions and believes that “the rate of change on earnings revision breadth to be the primary driver of equity prices going forward,” according to reports. “In our experience, when revisions breadth is accelerating in a V-shaped manner from an extreme low, equity markets typically remain supported and pullbacks remain shallow and unsatisfying (like the past 6 weeks),” the Morgan Stanley CIO wrote.

Cyclical Stock Outperformance Signals Market Optimism

Cyclical stocks like banks, industrials and consumer goods have recently outperformed, suggesting that the market is focusing more on forward-looking signals rather than backward-looking hard data. Notably, cyclical stocks do well when the economy is growing, and according to reports, they are picking up momentum and providing a tailwind to the overall stock market. “Policy headwinds should ease soon, as Trump’s term began by front-loading disruptive tariff policies and will transition to more pro-growth initiatives like deregulation and tax cuts,” reports further explained. While it is possible that the sweeping tariffs imposed by Trump would result in inflation over the summer – a theory also put forward by Federal Reserve Chair Jerome Powell – Morgan Stanley believes the stock market has already reacted to the tariff news from April, and it probably will not hurt stocks much more going forward.

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