The rebound in U.S. equities this week is stoking an argument that’s raged all year on Wall Street: When will this bear market end? 

The answer may lie in the current earnings season, which kicked off last week, specifically Corporate America’s outlook for future profits, according to Morgan Stanley. A reset in earnings expectations could prompt investors to seek an inflection point in the market, with the S&P 500 Index set for its biggest annual decline since the global financial crisis.

“This earnings season in particular holds importance as it could shape the debate between the bulls and the bears,” strategists led by Michelle Weaver wrote in a note to clients on Tuesday.

Strong results and stable guidance may “suggest a more moderate earnings correction or at least push the earnings debate until January’s fourth-quarter reporting season,” the strategists wrote. However, “a sharp reduction in earnings estimates could signal significant earnings cuts and a potential earnings recession.” 

Morgan Stanley’s Michael Wilson, a well-known stock market bear who correctly predicted this year’s slump, separately said Monday that U.S. stocks are ripe for a short-term rally in the absence of an earnings capitulation or an official recession. That could lead to the S&P 500’s bounce to 4,150, a 13% upside from Monday’s close. But he maintained his overall negative long-term stance on equities, cautioning that a bounce of that magnitude would be in line with prior bear-market rallies.

Companies have likely managed the quarter well enough to provide a “soft beat” given the lower bar, Weaver explained. Still, the broad consensus among the bank’s client base is that 2023 earnings remain too high. While corporate profits in the S&P 500 are expected to increase 2.2% in the third quarter, growth is projected to sit at 5.7% in 2023, down from expectations of 9.7% in 2022, according to data compiled by Bloomberg. 

To fund managers surveyed by Bank of America Corp., the sentiment on stocks and global growth “screams macro capitulation,” opening the way to an equities rally in 2023, strategists led by Michael Hartnett wrote in a note on Tuesday. 

Even some of Wall Street’s fervent bulls are turning to sour this month. On Monday, JPMorgan Chase & Co.’s Marko Kolanovic—Wall Street’s most vocal bull—cut the size of his equity overweight and bond underweight allocations in the bank’s model portfolio, citing increasing risks from central bank policies and geopolitics. Earlier this month, he warned that hawkish central banks have put the firm’s 2022 price target of 4,800 at risk for the S&P 500.

For Morgan Stanley’s Weaver, there are 12 stocks that are poised to “react materially to near-term events.” Seven companies that are expected to react positively include Arcutis Biotherapeutics Inc.; Arista Networks Inc.; Cboe Global Markets Inc.; Cummins Inc.; DTE Energy Co.; MercadoLibre Inc.; and Patterson-UTI Energy Inc. Meanwhile, five stocks in particular could face declines like CAE Inc.; Logitech International SA; Micron Technology Inc.; Seagate Technology; and Zebra Technologies Corp.

—With assistance from Farah Elbahrawy and Sagarika Jaisinghani.

This article was provided by Bloomberg News.