Morgan Stanley foresees a sudden downturn in corporate earnings that will significantly impact the flourishing US equity rally, diverging from the prevailing estimates on Wall Street.

In contrast, the esteemed investment bank expresses optimism towards equities in Japan, Taiwan, and South Korea. Additionally, they advocate for an overweight position in developed-market government bonds, encompassing long-dated Treasuries, as well as an inclination towards the dollar.

Leading strategists, led by Andrew Sheets, predict a substantial 16% decline in earnings per share for the S&P 500 this year. This forecast stands out as one of the most pessimistic projections among those monitored by Bloomberg, creating a stark contrast to the bullish outlooks put forth by institutions such as Goldman Sachs Group Inc., which anticipate modest growth.

“We think that the downside risk to US earnings is now,” Morgan Stanley analysts wrote in a note published Sunday.

“While a deteriorating liquidity backdrop is likely to put downward pressure on equity valuations over the next three months, we also see EPS disappointment ahead as revenue growth slows and margins contract further.”

According to Morgan Stanley’s analysis, the anticipated earnings per share for the S&P 500 is expected to be $185, while strategists have predicted a median value of $206.

Additionally, Morgan Stanley’s team of experts has offered their outlook for the S&P 500 index itself.

They foresee the index reaching 3,900 by the end of the year, a notable decrease from the Friday closing value of 4,282.37.

This prediction indicates that the benchmark index may be on the verge of entering a bear market, following a significant 19.7% rally from its lowest point in October.

Despite concerns surrounding potential interest rate hikes by the Federal Reserve and worries of an impending recession, the S&P 500 has managed to sustain its upward momentum, largely driven by the growing enthusiasm for stocks in the artificial intelligence sector.

In addition to their market projections, Morgan Stanley’s strategists have made a series of recommendations to investors.

They advise considering defensive stocks and investing in developed-market investment-grade bonds, which are perceived as more stable and secure options.

Furthermore, for investors seeking higher yields, the strategists suggest prioritizing additional tier-one securities over high-yield bonds.

These securities, a form of subordinated bank debt, are believed to offer better returns for those with an appetite for risk.