A senior Morgan Stanley portfolio manager says sentiment on Wall Street may be signaling that the stock market is primed for a letdown.
In a new CNBC interview, Andrew Slimmon says earnings projections and growth assumptions are creating conditions where the market ultimately falls short of investor expectations.
“But what does worry me is that we have high earnings estimates so far. They’ve come through a high GDP outlook. Wall Street’s pretty bullish on the year. That’s a dangerous concoction that is ripe for some disappointment at some points.
Not a reason to run out and sell stocks, but usually returns when expectations are this high, that is consistent with late cycle.”
Slimmon says one area of disappointment may come from hyperscalers as Big Tech firms pile onto their balance sheets after announcing hundreds of billions of dollars in AI spend.
“The hyperscalers had so much cash, and they were a reliable source of earnings. But now they’re spending that on massive, like $200 billion a piece CapEx, and they’re going out into bond markets to buy tens of billions of dollars to leverage up their balance sheets. So the picture looks a lot different, 100%.”
According to Slimmon, that change is helping explain why market leadership has begun to broaden beyond the biggest tech names, creating opportunities away from Mag 7 names.
“This is why the 493 is starting to work. There are plenty of other areas where companies reported very good earnings. I think you take advantage of financials would be one of them, industrials. And they sold off last week as the market rotated into staples, energy, the normal defensive. So I think that creates an opportunity.”
Slimmon cautions that markets tend to react poorly when free cash flow turns negative, even if valuation multiples compress.
“As free cash flow turns negative, negative for some of these very large companies, markets are not going to like that, even though the multiples will come down. I think that is a wait-and-see for these big guys.”
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