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Morgan Stanley Sees Risk of S&P 500 Profit Reversal on Leverage

  • Falling inflation will weigh on profits, Morgan Stanley says
  • Receding demand, sticky cost pressure dims margin outlook

The post-pandemic market has been a story of surprises, from the Nasdaq’s uncanny resilience and the rise of meme stocks to the sturdiness of profits in the face of inflation.

The latter is a big reason stocks have bounced 12% in six weeks -- company results have avoided predictions for catastrophe, with firms defending margins as prices rose for customers. Now, new research is warning that an equally hard-to-predict hazard exists for profits on the way down, if the tables turn again and inflation begins to fall.