Investors are looking toward the third quarter's expected 20 percent-plus earnings growth as fuel to put the bull market back on track, but several analysts warn that the earnings season may bring a new cause for concern.
Morgan Stanley chief equity analyst Mike Wilson is among the latest to warn that rising costs may bite into profits more than expected and expectations are too optimistic. Goldman Sachs chief equity strategist David Kostin warned about rising rates and higher costs earlier in the week, and RBC chief equity analyst Lori Calvasina said she has been cautious on the earnings season because of the negative potential from rising costs from tariffs to show up in earnings outlooks.
"Optimistic estimates reflect constructive company guidance around margins, despite rising costs," wrote Wilson, who is chief U.S. equity strategist and chief investment officer of Morgan Stanley Institutional Securities and Morgan Stanley Wealth Management.
Rising interest rates and concerns about trade wars have triggered a sell-off in stocks. The Dow was down 230 points in early afternoon trading, after an 832 point drop Wednesday. The index is now down 4.2 percent for the month, while the broader S&P 500 is down 5.5 percent. Tech has led the declines, and the tech-heavy Nasdaq is down 8.3 percent since the start of October.
Wilson said technology stocks are vulnerable to rising costs. "Many investors we speak to believe elevated Tech margins will remain resilient, keeping margins stable for the overall market. We disagree and argue that Tech is more cyclical than many appreciate," he wrote.