US stocks have rallied in 2023 as signs of easing inflation fueled bets the Federal Reserve (Fed) could slow the pace of rate hikes. But, Morgan Stanley strategists are warning that the S&P 500 could fall as much as 26% in the first half of this year, with the gauge ending the year at 3,900 index points, about 4.7% below where it closed on Friday.
Michael Wilson, the Morgan Stanley strategist ranked No. 1 in last year’s Institutional Investor survey when he correctly predicted the sell-off in stocks, sees a bear case of the S&P 500 falling to 3,500, which is around the same level the stock market bottomed at in October and represents 15% downside from current levels.
Wilson has said that the risk-reward for equities is now “very poor,” especially as the Fed is far from ending its monetary tightening, rates remain higher across the curve and earnings expectations are still 10% to 20% too high. JPMorgan Chase & Co. strategist Marko Kolanovic also said Monday he's “turning more defensive” on stocks and recommends investors should fade the stock market rally of 2023 because “a recession is currently not priced into equity markets.”
The strategist added that the market is “about as disconnected from reality as it’s been during this bear market,” positing the S&P will fall 5% to end the year at 3,900 points, but could tumble as much as 14% to 3,500 if things get much worse. Kolanovic wrote that equities are overpricing recent good news on inflation and are complacent of risks, while Wilson wrote that investors have followed stock prices to “dizzying heights” in pursuit of the ultimate topping out of greed.
The risk is that the Fed will raise interest rates further as price pressures remain elevated, while a glum outlook for corporate earnings has dampened risk sentiment in the past few days. Unless the Fed can provide a soft landing, stock valuations could remain in the so-called “death zone”, where investors have been warned of catastrophic consequences.
0. “Optimism about stocks is still too high as the US economy is showing ‘the overheat before the retreat', JPMorgan strategist says” Yahoo Canada Finance, 17 Feb. 2023, https://ca.finance.yahoo.com/news/optimism-stocks-still-too-high-124717176.html
1. “Stock Market Just Made The ‘Same Mistake Again’—Here’s Why Experts Are Worried About The Latest Rally” Forbes, 13 Feb. 2023, https://www.forbes.com/sites/jonathanponciano/2023/02/13/stock-market-just-made-the-same-mistake-again-heres-why-experts-are-worried-about-the-latest-rally
2. “Morgan Stanley Says S&P 500 Could Drop 26% in Months” Yahoo! Voices, 21 Feb. 2023, https://www.yahoo.com/now/morgan-stanley-wilson-says-p-063632540.html
3. “JPMorgan's Kolanovic Urges Investors to Ditch Stocks for Bonds” Financial Post, 13 Feb. 2023, https://financialpost.com/pmn/business-pmn/jpmorgans-kolanovic-urges-investors-to-ditch-stocks-for-bonds
4. “Wall Street's top strategist warns stocks have climbed into the ‘death zone' where ‘they shouldn't go and cannot live very …” Yahoo! Voices, 20 Feb. 2023, https://www.yahoo.com/now/wall-street-top-strategist-warns-170944264.html