Macromavens President Stephanie Pomboy shares her insights on the 2023 market outlook on Maria Bartiromos Wall Street.
The US stock market could face even worse losses in 2023 than many investors are currently expecting, according to strategists at Morgan Stanley.
Michael Wilson, chief US equities strategist at Morgan Stanley and a longtime Wall Street bear, warned in an analyst note on Monday that while consensus is forming on expectations of a recession in the first half of the year, investors may be underestimating the risk weaker corporate earnings and a Federal Reserve committed to fighting inflation.
“The consensus may be right in direction but wrong in extent,” Wilson wrote in the note.
He suggested the S&P 500 could fall to 3,000 points by the end of the year, down about 22% from current levels. The leading index already fell by around 19% in 2022.
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Traders work on the floor of the New York Stock Exchange (NYSE) on June 10, 2022 in New York City. Shares fell over 800 points on Friday as inflation fears continue to spook investors. ((Photo by Spencer Platt/Getty Images)/Getty Images)
“Our concern is that most assume that ‘everyone is down’ and therefore the price downtrend in a recession is also likely to be small (SPX 3500-3600),” Wilson wrote. “In that regard, the surprise might be how much lower stocks (3,000) could be trading if a recession hits.”
Stocks have rallied in early 2023, with the S&P up about 2% on Monday after December’s better-than-expected jobs report, which showed wage growth had slowed significantly over the past month. A separate report from the Institute for Supply Management showed that the service sector contracted in December, raising hopes that the Federal Reserve will halt its aggressive campaign of interest rate hikes sooner than previously expected.
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But the recovery rally — and the possibility of a slowdown in consumer prices — is unlikely to last long, Wilson said, as slowing inflation weighs on corporate earnings.
The Marriner S. Eccles Federal Reserve building in Washington, DC, USA, on Wednesday, July 6, 2022. (Photographer: Al Drago/Bloomberg via Getty Images / Getty Images)
This “ignores the impact of falling prices on profit margins, which will likely outweigh any benefit from the perceived Fed dovishness that equity investors are dreaming about later this year,” he wrote. “Additionally, we highlight that the dramatic failure of ISM Services that sparked Friday’s bond rally sends an ominous signal for growth.”
Fed policymakers already voted last year to raise interest rates seven times in a row to a range of 4.25% to 4.5%, well into the restrictive zone.
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Officials also laid out an aggressive path of hikes for 2023, saying they intend to keep rates at elevated levels “for some time.”
“Participants generally noted that until incoming data gave confidence that inflation was on a sustained downward path to 2 percent, which would likely take some time, tightening policy would need to be maintained,” the Fed minutes said . “With inflation persistent and unacceptably high, several participants noted that historical experience warns against easing monetary policy prematurely.”