Investors Shouldn’t Bank on Resurgent Corporate Earnings

Sep 20, 2023

Sticky inflation, bloated inventories and a weary U.S. consumer could dash investors’ hopes for resurgent corporate earnings in 2024.

Lisa Shalett

Key Takeaways

  • Wall Street analysts expect a 12% rise in company profits next year, but recent economic data may call for a less rosy outlook.
  • Persistent inflation could weigh on consumer demand and corporate margins. 
  • Overstocked shelves, rising credit-card balances and dwindling consumer savings could further weaken economic activity.
  • Investors may want to focus on fixed income, given its attractive yields and the diminished potential reward for the risk of holding stocks. 

For much of 2023, investors and analysts who are bullish on U.S. stocks have based their rosy outlook on the belief that the Federal Reserve would quickly claim victory over inflation without hurting the economy too much. This narrative helped stocks gain about 19% from March through July.


Now, with equity gains having stalled out, optimistic investors have shifted their focus to a re-acceleration in corporate earnings. In fact, analysts have increased their profit forecasts for S&P 500 Index companies, with a consensus view that now puts 2024 earnings up 12% year-over-year to about $250 per share.


Morgan Stanley’s Global Investment Committee, however, is skeptical that companies can achieve this kind of rapid earnings re-acceleration. A number of recent data points suggest increased risks to corporate profitability:

  1. 1
    Still-sticky inflation

    Last week’s consumer price index (CPI) report suggests the Fed remains far from having tamed inflation. Headline CPI jumped, based on surging fuel prices in August: It was up 0.6% from July, the biggest monthly gain this year, and up 3.7% from a year earlier. Core CPI, which excludes volatile food and energy prices, rose 0.3% for the month, higher than forecast. 


    Importantly, the “super-core” personal consumption expenditures (PCE) inflation metric, which excludes food, energy and housing prices and is closely linked to the service sector of the economy, accelerated for the third month in a row. This measure has remained around 4.5% for the past 18 months. These numbers illustrate that inflation is still sticky, which could weigh on consumer demand and corporate margins, while maintaining pressure on the Fed to keep rates higher.

  2. 2
    Bloated inventories

    Although retail sales have remained robust, inventory volumes are still about 10% above long-term trends. As these volumes return to normal, manufacturers could see weaker year-end orders, as businesses may have less of a need to replenish their inventories. In fact, this trend may already be in play: In July, a 5% drop in orders for durable goods (such as electronics, appliances and furniture) contributed to a 2% drop in total orders for U.S. manufactured goods, breaking a four-month streak of increases. While order activity in the service sector remains positive, this trend may not be enough to offset the impact of swollen goods inventories.

  3. 3
    Increasingly weary consumers

    A recent survey from the New York Federal Reserve found that consumers’ concern about their finances is growing, while their outlook on job and income prospects is deteriorating. Fueling those sentiments are surging credit-card balances, which have reached an all-time high, in excess of $1 trillion, just as the average annual interest rate charged on those balances has risen to around 22%, from around 15% over the past decade. Consumers are also spending down excess household savings, which rose as high as $2.1 trillion in 2021 but now stand at just about $100 billion. What’s more, student loan payments are set to resume in October, which could further dampen consumer spending going forward. 

Given these concerns—not to mention other key risks, such as a potential government shutdown and the continuing effects of interest rate increases—we are not convinced that corporate earnings will rapidly re-accelerate.


While individual investors’ circumstances will vary based on their goals and risk tolerance, now may be a good time to neutralize any extremes in a portfolio and balance equity exposure between offense and defense. It may be prudent to focus on fixed income, given attractive yields and, on the flip side, relatively small potential rewards for taking on the added risk of holding stocks. Finally, investors should consider “harvesting” tax losses in municipal bonds, preferred securities and Treasuries.


This article is based on Lisa Shalett’s Global Investment Committee Weekly report from September 18, 2023, “Early Cycle or Late?” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.

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