As per the Chief US Equity Strategist and Chief Investment Officer at Morgan Stanley, Michael Wilson, the US stocks could slump by 22% beyond the current rates, with a steeper 2023 selloff, due to a shock from the recession.

Being the expert who accurately foretold the 2022 selloff in the stock market, resulting in the three significant indexes affixing their lowest yearly losses after 2008, He predicted on Monday that the S&P 500 (SPX) might find its low, approximately 3,000 points by 2023-year-end. As per FactSet, this index was last trending at 3,919.

Presently, the market consensus assumes that the US economy may undergo a moderate recession by mid-2023, succeeding with a revival through the rest of 2023 as the Federal Reserve is likely to freeze the rate hikes and may further reduce rates, taking the aggravating economic circumstances into the picture.

But, the leading strategists at Morgan Stanley said that the surplus returns that investors could make for holding their stock investment rather than opting for safer assets, or the stocks’ ERP (Equity Risk Premium), stands “way too low given the high earning risks,” even though predictions for corporate returns remain “materially too high.”

Further strategists said, “When a recession arrives, the ERP always rises significantly from whatever level you are starting at. In other words, if you think a mild recession is coming, you cannot assume the market has priced it given the ERP is at its lowest level since the run up to the Great Financial Crisis in 2008.”

The base case forecast made by Morgan Stanley on the S&P 500, based on EPS – Earnings Per Share, is $195, while they predict the bear case rate as $180. Here, earnings per share mean the net revenue divided by the outstanding shares. It notifies the amount of money a company gains on a single share in its stock.

But, a majority of the Bank’s clients presume that the EPS on the S&P 500 may not be as substandard as the equity strategists indicate, with the team establishing the average client estimation ratio of approximately $210 to $215.

Wilson mentioned in the note, “Falling demand from higher interest rates and higher prices and payback from the pull-forward during COVID is happening just as supply is catching up to these formerly well-above trend levels of consumption.”

Further adding, “That combination has already caught many companies off guard who are unable to reverse the rising costs fast enough. The result has been disappointing margins relative to expectations, and we don’t think that reset is near completion.”

Wilson and his team said it explains why an S&P range of 3,500 to 3,600 stands inconsistent with the market consensus indicating a mild recession.

Wilson says, “The consensus might be right directionally, but wrong in terms of magnitude… We think it’s in the magnitude of the move lower led by much weaker earnings and a Fed committed to fighting inflation, making 3,900 an easy sale.”

As one of Wall Street’s top vocal bears, Wilson doesn’t stand alone with his opinions that the stock investors may experience a dreadful slump in 2023 while they may be embracing earnings expectations that seem way too favorable.

In an interview with CNBC last week, Michael Kantrowitz from Piper Sandler & Co. said that he anticipates the benchmark index to decline by approximately 3,225 by the end of 2023, or with a 16% slump from its current rates.

- Published By Team Nation Press News

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