Don't be fooled by a bear-market rally in stocks ahead of 15% further downside in the the S&P 500, Morgan Stanley warns
stock marketis set to fall as a slowdown in economic growth starts to materialize, according to Morgan Stanley's Mike Wilson.
- Wilson said negative earnings revisions are likely as the economy shows signs of slowing.
- "The bottom line is that this
bear marketwill not be over until either valuations fall to levels that discount the kind of earnings cuts we envision, or earnings estimates get cut," Wilson said.
Despite six straight weeks of losses for the broader stock market, investors shouldn't be fooled by any bear-market rally that may materialize, according to Morgan Stanley's Mike Wilson.
Wilson still holds a bearish view on the stock market as signs of a slowdown in economic growth begin to show, Wilson said in a Monday note. Recent PMI data shows deceleration, the economy contracted in the first quarter, and earnings revisions are deteriorating, Wilson highlighted.
"We're in the midst of a hotter but shorter cycle in the US. The key implication here is that the early-to-mid-cycle benefits of positive operating leverage are behind us and earnings growth is likely to decelerate, driven by margin compression and slowing top-line growth," Wilson said, adding that earnings weakness will persist into 2023.
"The S&P 500 is still not priced for this backdrop," Wilson said, adding that he expects the overall downtrend in stocks to continue. In Wilson's bear case scenario, the S&P 500 will drop 15% from current levels to 3,400 as a recession materializes due to sticky input and labor cost inflation.
"The bottom line is that this bear market will not be over until either valuations fall to levels that discount the kind of earnings cuts we envision, or earnings estimates get cut," Wilson said. The real question is whether management companies will lower their earnings guidance before analysts cut their estimates.
But the 10-Year US Treasury yield has begun to stabilize below 3%, the forward price-to-earnings multiple for the S&P 500 has fallen below its 10-year average, and stocks appear oversold after six straight weeks of declines. That sets the market up well for a sizable bear market rally, according to Wilson.
"Stocks appear to have begun another material bear market rally. After that, we remain confident that lower prices are still ahead. In S&P 500 terms, we think that level is close to 3,400, which is where both valuation and technical support lie," Wilson explained.
Wilson isn't the only Wall Street strategist with a bearish view on where the market goes from here. Goldman Sachs lowered its S&P 500 price target for the third times this year on Friday to 4,300 from 4,700. The bank also sees a 35% chance that the economy enters a recession over the next year, which if so would send the S&P 500 to about 3,600.
"While we don't have a recession baked into our base case forecasts, we do for our bear case because the risk of a recession has gone up materially. That is just another reason why the equity risk premium is too low, and stocks are still overpriced in our view," Wilson concluded.
- IAF scrambles fighter jets after bomb scare on Iranian civilian plane in Indian airspace
- Delhi reports over 400 cases of dengue in a week, taking the tally to 937
- PhonePe moves domicile from Singapore to India
- Noida-based LED IKIO Lighting files DRHP with SEBI to raise ₹350 crore
- Electronics Mart India IPO set to open on Oct 4; commands grey market premium of ₹30/share