The S&P 500 could drop 24% within months as earnings gloom reaches a crescendo, Morgan Stanley's investment chief warns

• The S&P 500 could fall 24% from current levels in early 2023, Morgan Stanley's Mike Wilson predicted.
• Companies will downgrade their earnings targets and that will drive a selloff in US stocks, he said.

Brace for a sharp selloff in US stocks within months, as earnings outlook downgrades drive prices lower, Morgan Stanley's investment chief has warned.

The S&P 500 could fall to 3,000 points in the early months of 2023 — the bank's bear case for the period, chief US equity strategist Mike Wilson told CNBC Tuesday.

If the benchmark stock index does fall that low, it would represent a 24% drop from Tuesday's closing level of 3,958.

"You should expect an S&P between 3,000 and 3,300 some time in probably the first four months of the year," he said. "That's when we think the deceleration on the revisions on the earnings side will kind of reach its crescendo."

Wilson is expecting fears of a recession to prompt major publicly listed companies to lower their earnings targets, and that will keep stocks in the bear territory where they have spent most of this year.

"The bear market is not over," Wilson said. "We've got significantly lower lows, if our earnings forecast is correct."

The S&P 500 has plunged 17% plunge year-to-date as concerns about recession, the Federal Reserve's aggressive interest rate hikes and Russia's invasion of Ukraine have rattled investors' confidence.

Wilson believes the index will finish 2023 trading close to its current level around 3,900. But the strategist noted that end-of-year targets for indexes now mean little to investors, given the high level of volatility in markets.

"Nobody cares about what's going to happen in 12 months — they need to deal with the next three to six months," he said. "That's where we actually think there's significant downside."

"So, while 3,900 sounds like a really boring six months — no, this is going to be challenging. It's going to be a wild ride."

Lower earnings could cause major pain for larger-cap stocks, Wilson said.

Big Tech stocks fared worst in 2022's third-quarter earnings season, with Amazon and Meta Platforms both cutting their earnings outlooks in response to consumer demand falling and digital advertising revenue drying up.

"Most of the damage will happen in these bigger companies — not just tech, by the way," Wilson said. "It could be consumer, it could be industrial."

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