(Bloomberg) -- Wall Street analysts are sticking with their bullish earnings forecasts for this quarter, and Morgan Stanley’s Lisa Shalett says they need a reality check.

“Economists have begun to cut their top-down economic forecasts for GDP, and yet fundamental company analysts are sitting there like deer in headlights not knowing what to do with numbers,” the Morgan Stanley Wealth Management chief investment officer said on Bloomberg TV Monday. “We just don’t see how we don’t get a recalibration here from the analysts that take the E in P/Es down.”

While investors are familiar with optimistic projections from Wall Street, analysts have further increased 2022 forecasts over the past month. Data from Bloomberg Intelligence show they expect companies in the S&P 500 to see profits grow by 10.7%, up from 10% a month ago and 8.7% at the start of the year. 

Shalett and other strategists find this far-fetched, given the unprecedented confluence of factors -- from aggressive Federal Reserve rate hikes to looming recession fears -- weighing on the market this year. 

“Analysts are still in fantasy land in terms of the earnings outlook, so that’s an adjustment that needs to happen in one of two ways -- either the analysts get more realistic and start to revise earnings down, which will be its own negative-sentiment event for investors, or reality bites and the second or third-quarter earnings come out and you have more disappointments than upside surprises,” David Donabedian, chief investment officer of CIBC Private Wealth Management, said in a phone interview. “And that’s obviously not going to be well-received in the market.”

The S&P 500 Index has tumbled about 18% this year amid building recession worries as the Fed boosted borrowing costs to combat inflation.

‘Tough Environment’

When the stock market falls like this, analysts’ forecasts usually follow. But not this time.

“There’s no doubt that it is an extraordinarily tough environment in which to forecast,” Shalett said. “There’s a little bit of a wait-and-see. I think people are very, very focused on second and third-quarter earnings and the commentary by management and guidance.”

Shalett also criticized the reliance on corporate guidance by so-called bottom-up analysts -- those who issue buy, hold and sell recommendations. 

“It’s horrifying there is very little proactivity among bottom-up analysts to go out on a limb and cut numbers without corporate management telling them exactly what to do,” Shalett said. “That’s problematic in terms of their value proposition to investors because it’s not particularly helpful.”

Data compiled by Bloomberg show that companies in the S&P 500 Index, on a scale of 1 to 5 with 5 being a buy and 1 being a sell, have an average consensus rating of 4. That’s the highest reading since 2002.

US stocks rebounded last week, gaining around 6.5% in their second-best reading of the year. “This is a classical bear-market rally,” Shalett said. “If you look at things, one of the narratives of bear markets is that you actually have to eliminate the vast majority of negative catalysts and the single biggest one that’s still out there is a recalibration of earnings expectations.”

To be sure, tech analysts have been quietly cutting their 2022 and 2023 earnings estimates over the last 30 days -- a trend Nicholas Colas, co-founder of DataTrek Research, found unsurprising.

“The Street is too high again in 2022, but what really matters is current valuations,” he wrote. “We do, however, wonder if that portends further downside revisions once we see Q2 earnings announcements.”

©2022 Bloomberg L.P.