The S&P 500 could fall as much as 26% in the next few months, predicts strategists at Morgan Stanley, according to an article in Bloomberg. Even if the economy avoids a recession, the Fed is unlikely to pivot back to cutting rates, which could hurt stocks. U.S. equities are now the priciest they’ve been since 2007, entering a level the strategists called a “death zone.” With interest rates likely to stay higher for longer, and the Fed still tightening, earnings expectations are anywhere from 10% to 20% too high, wrote Mike Wilson, the Morgan Stanley team lead, in a note.
U.S. stocks have rallied so far this year after a dismal 2022, amid signs that inflation is beginning to cool and expectations that the Fed will pull back on their rate hikes. However, policy makers have consistently indicated that interest rates will remain high, and likely rise even higher if price pressures continue to be elevated. Meanwhile, the outlook for corporate earnings appears gloomy, giving a rise to negative investor sentiment, the article details.
The Morgan Stanley team isn’t the only one sounding the alarm; JPMorgan Chase & Co. called optimism for an economic rebound and easing Fed policy “premature,” while Bank of America’s Michael Hartnett predicts the S&P 500 will plummet to 3,800 points by March 8th, roughly a 7% decline from its current levels. Though Wilson at Morgan Stanley is much more pessimistic, believing that the S&P 500 could fall as far as 3,000—a 26% decline—his forecasts have been closely followed as he was ranked No. 1 in a 2022 Institutional Investor survey after he rightly predicted last year’s massive stock selloff.