Sell any stock rebound resulting from banking-system intervention, Morgan Stanley CIO says

• Sell bounces in the stock market as the impact of SVB's failure plays out, said Morgan Stanley.
• The government's assurance to depositors eases contagion fears, but earnings are under pressure.

The US government's work to prevent widespread bank runs after Silicon Valley Bank's implosion may soothe the stock market, but Morgan Stanley suggests investors should sell bounces for the time being.

Depositors at Silicon Valley Bank will be fully protected from losses after regulators shut down the lender late last week, with those assurances coming from the Treasury Department, the Federal Reserve, and the Federal Deposit Insurance Corporation.

But that doesn't erase the downward pressure that will bear upon earnings at banks and the overall US economy, which is already slowing down, Morgan Stanley said in its strategy note released Monday.

"We suggest selling any bounces on a government intervention to quell the immediate liquidity crisis at SVB and other institutions until we make new bear market lows, at a minimum," Mike Wilson, Morgan Stanley's chief investment officer, wrote.

The S&P 500 finished slightly lower Monday but had risen during the session as markets were beginning to price in expectations that the Fed may pause in raising interest rates at its March 21-22 meeting.

Stocks experienced their worst week of the year last week, when the S&P 500 nearly erased all its gains for 2023. Regional bank stocks sank as contagion fears persisted.

Silicon Valley Bank collapsed after the lender faced a $1.8 billion loss on the sale of a bond portfolio, the value of which was hurt by the Fed's aggressive rate hikes. Fears that uninsured deposits were at risk triggered a bank run.

Wilson has already been warning of a sell-off in stocks spurred by falling growth in corporate earnings. He said Monday that most banks have been paying below-market rates because depositors have been slow to realize that better returns are available in other areas.

"But, that has changed more recently with depositors deciding to pull their money from traditional banks and putting it into higher-yielding securities like money markets, T-Bills and the like," Wilson said. "We expect that trend to continue unless banks decide to raise the rate they pay depositors. That means lower profits and likely lower loan supply."

Wilson said the collapse of Silicon Valley Bank and surrounding events serve as "just one more supporting factor" for its outlook for negative earnings growth outlook.

"[It] only exacerbates key headwinds like credit/money supply growth. In short, Fed policy is starting to bite, and it's unlikely to reverse even if the Fed were to pause its rate hikes or quantitative tightening," he said.

Wilson added: "[the] die is cast for further earnings disappointments relative to consensus and company expectations."