By Nick Baker
March 30 (Bloomberg) — Investors should sell U.S. stocks following the steepest rally since the 1930s because earnings are likely to keep weakening, according to Morgan Stanley.
The Standard & Poor’s 500 Index has advanced 21 percent in the past 14 trading days, the most since 1938, according to data compiled by New York-based S&P analyst Howard Silverblatt. It closed at 815.94 last week, rebounding from the 12-year low of 676.53 reached on March 9.
“We cannot see large upside for the S&P 500 above the 825- 850 level,” Morgan Stanley strategist Jason Todd wrote in a report dated yesterday. “We see a lack of fundamental support outside the financial sector, where there is now a fast-growing belief that policy action and bank guarantees may have finally backstopped the downside.”
U.S. companies will start reporting results for the first quarter in the next two weeks. Analysts, who have overestimated profits for every period since the third quarter of 2007, expect S&P 500 earnings to drop 36 percent on average, paced by retailers, automakers and semiconductor suppliers, according to data compiled by Bloomberg. They’re forecasting S&P 500 companies won’t halt the longest streak of declining earnings since at least 1947 until the fourth quarter.
“In the rush to buy a cyclical recovery, it seems earnings or valuation no longer matters,” Todd said. “We would be comfortable with this view if the earnings trough was closer, but it is not, and we think this does matter.”
To contact the reporter on this story: Nick Baker in New York at firstname.lastname@example.org.
Last Updated: March 29, 2009 20:42 EDT