In its mid-year outlook, published just two weeks ago, Morgan Stanley – while still sticking with an overall bullish outlook – argued that it’s “often better to travel than arrive.” After all, markets are discounting machines and often anticipate changing dynamics long before they become obvious. However, as the bank’s chief equity strategist Michael Wilson writes today, “eventually such changes do become obvious and priced, at which point a reset is required or evidence the higher expectations are not only achievable, but beatable.”

In many ways, Wilson writes, “this year represents such a period when last year’s extraordinary moves in stocks are justified by the fundamentals” and his V-shaped recovery call from last year is now the consensus. Actually, no – Wilson laments that in its eagerness to catch up, the consensus is now ahead of what Morgan Stanley thinks will occur over the next 12 months: “More specifically, post Q1 earnings results, bottom-up 2022 EPS estimates are now ahead of our top forecasts for the first time since the recovery began.”

To be sure, there is some fundamental justification for this euphoria: in Wilson’s review of past earnings surprises, he has never witnessed such a large beat rate over a four-quarter period and/or revisions to out-year forecasts (something we predicted would happen ahead of earnings in “Q1 Earnings Will Be Stellar, But Are Fully Priced-In And Only Guidance Will Matter“). And while the results over the past year have been very much in line with Wilson’s call for superior operating leverage coming out of this recession, he is “now concerned that these results have been extrapolated in a way that is too optimistic.” First, over the past 4 quarters, earnings have beaten expectations by over 20%.

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