The long-awaited earnings recession has finally arrived, but investors are still too optimistic and should anticipate more disappointment as the year drags on, according to Morgan Stanley.

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Equity chief Mike Wilson lowered his 2019 S&P 500 earnings per share growth expectation to 1 percent from 4.3 percent based on the many downward profit revisions during the fourth-quarter reporting season.

And while consensus numbers are already pricing in zero growth for the first half of this year, Wilson argued that predictions for a reacceleration in the second half of 2019 are misplaced. He said the year could end with earnings down as much as 3.5 percent overall.

“We are increasingly convinced that consensus earnings expectations for 2019 have further to fall and that the optimistic uptick currently baked into fourth-quarter 2019 estimates is unlikely,” Wilson wrote Monday. “A modest further decline in earnings will deliver the earnings recession we called for. Equity returns can still be positive in this environment, but they will likely be weaker than they otherwise would have been.”

Source: John Butters, FactSet

Wilson, who first predicted an earnings recession in 2018, now sees 2019 S&P 500 EPS at $164, below the consensus estimate of $170.

The strategist added that when investors have assumed a jump in earnings growth four quarters out in the past, the numbers for all four quarters ahead tend to fall but the growth quarter tends to fall the most. In fact, if current estimates move in line with history, investors could see a full-year decline of 3.5 percent in S&P earnings, he wrote.

About 66 percent of the S&P 500 has reported fourth-quarter 2018 earnings thus far. While nearly 70 percent have topped analyst expectations on the bottom line, only 60 percent have surprised to the upside on revenue. Looking ahead, Refinitiv joined other market data researchers FactSet and S&P last week in predicting a decline in S&P 500 earnings in the first quarter of 2019.

FactSet predicted a first-quarter earnings loss of 2.1 percent as of Monday morning.

“Downward revisions have come even faster and steeper than we expected and the [consensus] full year earnings growth number now sits just above 5 percent with a material upward acceleration projected in the fourth quarter,” Wilson told clients. “At the start of a downward revisions cycle, history tells us not to count on that kind of upward inflection.”

Wilson was the most accurate Wall Street strategist tracked by CNBC in 2018 and has issued a streak of bearish calls about the S&P 500 and earnings performance over the past year. He did not adjust his current 2019 S&P 500 year-end price target of 2,750.

That estimate is the lowest of 2019 and implies less than 2 percent upside from Friday’s close.Wilson has repeatedly warned of dismal results in equitiesand said investors could be caught in a “rolling bear market” for the next several years with the S&P 500 trading in a range of 2,400 to 3,000.

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