“Experts Predict a Potential 14% Decline in Stocks for Morgan Stanley in the Next Year”

Wall Street Veteran Predicts Further Decline for S&P 500 in 2023

Mike Wilson, the chief investment officer and chief U.S. equity strategist at Morgan Stanley, has never shied away from making bold predictions about the stock market. In 2021, he predicted a bear market caused by a combination of Federal Reserve interest rate hikes and slowing economic growth. Wilson’s prediction turned out to be correct, as the S&P 500 fell roughly 20% last year. In 2023, he argued that the S&P 500 could drop as low as 3,000 as corporate earnings growth slowed. However, the index has done the opposite, rising more than 12% year-to-date to over 4,300. Wilson remains unfazed, maintaining his bear market thesis.

Earnings Recession Affecting S&P 500

Wilson argues that stocks are in the midst of an “earnings recession” that hasn’t been priced in by Wall Street’s profit expectations. More than 70% of S&P 500 sectors have forward earnings expectations from Wall Street that are “at least 20% above pre-covid levels.” Even Morgan Stanley’s earnings forecast for the overall index is “10% above the long term earnings trend line.” Wilson’s base case is for the S&P 500 to drop roughly 3% over the next 12 months to 4,200, but in a bear case scenario, he believes the index could fall to 3,700, or around 14% from current levels.

Falling Inflation and Margin Compression

Wilson’s bearish theory is based on the idea that falling inflation will lower corporate profits, just as rising inflation helped to increase them in 2021. Businesses were able to pass on rising costs during the pandemic and increase profit margins. However, with inflation falling and economic growth slowing, we’re entering a period of “margin compression.” This is due to weakened demand, both realized and expected, slower inflation, realized and expected, and less ability for businesses to pass along elevated costs to consumers.”

Higher Interest Rates Leading to Boom/Bust Regime

Wilson also argues that higher interest rates are leading the economy into a “boom/bust regime” like what was seen after World War II. He explains that during both WWII and the pandemic, consumers built up excess savings during a period when the supply of goods and services was constrained, causing inflation and the stock market to surge when the economy reopened. Then, a period of higher interest rates followed, which ultimately sparked a bear market and a recession in 1948. Wilson fears modern investors are falling into the same trap again.

Conclusion

Mike Wilson’s predictions have been accurate in the past, making him a highly respected figure in the financial industry. Wilson argues that an earnings recession, falling inflation, and higher interest rates will ultimately lead to a bear market for the S&P 500, despite price targets by other investment banks such as Goldman Sachs. Wilson’s bearish theory calls for the S&P 500 to drop 3% over the next 12 months to 4,200, with a bear case scenario of it falling to 3,700, or around 14% from current levels. Investors and analysts alike will be keeping a close eye on the stock market to see if Wilson’s thesis holds true once again.