US Stock Market: S&P 500 Expected to Decline, says Morgan Stanley’s Top Strategist

US Stock Market S&P 500 Expected to Decline, says Morgan Stanley's Top Strategist

Key Insights

  • Morgan Stanley’s top strategist predicts a drop in the S&P 500, with earnings falling short of expectations, hindering any potential rebound.
  • He maintains a long-standing forecast of the S&P 500 falling to 3,900 points by the end of 2023.

Morgan Stanley’s top strategist, Mike Wilson, issued a stark warning on the future of US stocks, painting a gloomy picture for investors.

Wilson predicts that the S&P 500 is set to face a bumpy road ahead, with a drop in the near future due to earnings that are likely to disappoint, extinguishing hopes of an imminent rally for the benchmark index.

In a research note obtained by MarketsXplora, Wilson articulated his concerns.

We would not be surprised to see a further move lower in price this week below the October lows before the next attempted rally, he said.

This pessimism stems from the bank’s evaluation of earnings, valuations, and policy. Wilson, the CIO and chief US equity strategist, firmly believes that the S&P 500 will encounter significant difficulty in reclaiming levels of support it held before its recent five-day losing streak.

S&P 500 to dip to 3,900 points by the close of 2023

Opposed to hopes of a resurgence, Wilson maintains his longstanding forecast that the S&P 500 will plummet to 3,900 points by the close of 2023.

As of Monday’s closing bell, this would signify an 8% decline from the current levels.

The woes in the earnings department add to the growing concerns on Wall Street, as stock investors are already grappling with the unanticipated surge in longer-duration Treasury bond yields. Tesla, in particular, sent shivers through the market when it missed third-quarter targets, a disappointment further exacerbated by a challenging earnings call where CEO Elon Musk expressed concerns about economic headwinds and production delays for the Cybertruck.

In the coming week, heavyweight companies often referred to as the “Magnificent Seven” – Microsoft, Alphabet, Meta Platforms, and Amazon – are slated to release their quarterly earnings. This only intensifies anxieties about the profitability trajectory for US stocks.

Adding to these concerns, Wilson anticipates that stocks will face a rocky road due to the Federal Reserve’s reluctance to cut interest rates in the near future. The central bank has been unambiguous in its signals, revealing its intention to maintain high borrowing costs until well into 2024 in a concerted effort to combat stubbornly high inflation, which remains above its 2% target.

Wilson expressed his view, stating,

While the Fed may be close to pausing its tightening campaign, it is likely far from ready to begin loosening its stance.

Furthermore, the tightening measures the Fed has executed over the past 18 months are starting to ripple through the broader economy.

This policy approach could prove detrimental to stocks, as higher interest rates typically lead to diminished investor interest. Savers can secure more attractive returns in savings accounts, while higher borrowing costs erode the future cash flows of publicly traded companies. This confluence of factors sets a daunting stage for the future of US stocks, clouding the path to a market rebound.

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