A string of eye-catching earnings misses by tech and retail leaders signals it is payback time for stocks, and that could cause markets to fall.

Shalett said in a note this week that investors can expect a shock from earnings revisions as companies face new challenges.

The market narrative has changed from concerns about the Federal Reserve being able to execute a soft landing for the economy and tame inflation to concerns about corporate earnings and the risk of a recession.

She wrote that certain misses in corporate earnings last week shone a light on rising costs and diminished consumer demand.

The CIO of the wealth management commented on the stock market last week when a cut in earnings outlook from Snap hit the stock market.

The shares in the parent ofSnapchat plummeted as much as 38% on Tuesday.

The macroeconomic environment has deteriorated further and faster than anticipated, which will hit hiring and revenue growth for the rest of the year.

Walmart, Target, Amazon, and Alphabet pointed to similar pressures in recent updates as they warned of profit and missed earnings targets.

Corporate earnings surged in 2020 and 2021, fueled by record government stimuli that skewed demand among consumers towards goods and to stay at home winners in the early days of the Pandemic.

Slower economic growth and the Fed's monetary policy tightening have hurt these trends.

"It seems inevitable that there was going to be some payback in corporate earnings this year."

Consumers spending more on services at the expense of goods, and inflation hitting corporate expenses, would take a hit.

Morgan Stanley said that even the biggest tech companies are unlikely to be immune from the threats of tighter policy, higher inflation and a stronger dollar.

The next phase of stock rerating has begun after last week's notable earnings misses in the retail and tech sectors due to excess inventories, high costs and price-related demand destruction.

According to Morgan Stanley, the US 75-day earnings revisions were the worst among all markets.

The Federal Reserve&s monetary tightening, the risk of an economic slowdown, soaring inflation, and the impact of the Ukraine war have caused stocks to fall.

The S&P 500 is off 15% and flirting with a bear market, while the tech-laden Nasdaq is down 25%, the most of any other market.

An earnings revision shock could drag down US stock markets further.

She said that stock market indexes could suffer another 5% to 10% downside from this resetting of earnings expectations.

Morgan Stanley's investment chief recommended using market volatility to move portfolios toward maximum diversification, quality factors and active management. She said to put cash in investment grade bonds, non-US stock funds, and cyclicals.