Recession Risk Increases: Stocks Could Fall Another 15%

The Chief U.S Equity Strategist and CIO at Morgan Stanley says that stocks have yet to reach their bear market low in spite of recent struggles with the economy, arguing it will take more than just a few bad news stories for this trend to change.

“In S&P 500 terms, we think that level is close to 3,400,” Wilson wrote in his note on Friday. “This means a significant pullback may be coming and both valuation levels (at current prices) as well technical support/resistance are within reach.”

Wilson forecasts that the S&P 500 will make a 15% drop from Monday’s levels by next spring, but he expects it to recover and reach 3,900 by then. A flat trading year may not seem like music to an investor’s ears.

The markets have been in a downturn for the past few weeks and many people are arguing that it’s time to call for economic recovery. Morgan Stanley, on their end though, says they don’t see any serious problems just yet even with all these negatives happening around us now. The S&P 500 posted its sixth straight week of losses which is unprecedented since 2011 when we last saw an economy hit rock bottom.

Wilson argues that the risk of a recession has gone up, and Morgan Stanley’s bear case now assumes we will be in one by 2023 due to sticky inflationary pressures as well as margin declines across many industries.

As the world economy cracks at its seams, many banks are warning about an impending recession. Deutsche Bank executives and former Goldman Sachs CEO Lloyd Blankfein agree with them by arguing that their risk level is very high currently.

The end of the year 2022 will be here before you know it, and Morgan Stanley has released its “2022 Year Ahead Outlook” which predicts that the S&P 500 could see a 20% drop. The investment bank’s economists argued that “fire” from the Federal Reserve’s interest rate hikes would hurt stocks’ performance in Q1.

Advertisement

The argument goes that because of supply chain issues and inflation, economic growth will be slowed down. What’s worse is the COVID-19 lockdowns in China or ongoing war with Ukraine are playing their part as well.

Even though the street gave a cold reception at first, its economists were still able to stay true and be on track so far.

The economic landscape is changing, and it’s affecting how investors evaluate stocks. The first quarter of this year saw sluggish growth rates as well. An index that measures investor confidence dipped to its lowest point in almost three years – which means they’re re-appraising riskier names like tech giants or name-brand growth companies more heavily now than before.

Morgan Stanley’s report was an eye-opener for many investors when it came out. The S&P 500’s price-to-earnings ratio, or P/E index as it is more commonly known has never been higher than 21.5x at any point during history, other than the dot com bubble which burst in 2001 and 2009 respectively. Leading up to today where the index records trading activity around 17 times per share based on estimated annualized fourth-quarter earnings growth rates, thus providing an opportunity to buy stocks while prices remain low.

Morgan Stanley is out with a new report, warning that the current stock market pain could continue for quite some time yet. They argue earnings guidance has been disappointing so far and will likely remain weak through 2022 due in large part to lower-than-expected economic growth rates which would also negatively impact corporate profits as well.

The consensus is that this bear market will not be over until valuations fall to levels (14-15x) or even lower than where they are now. There are many people who think it could happen sooner due to the fact some analysts have already predicted cuts in earnings estimates for next year, which would likely cause more asset value decreases. Among other things like stocks prices going down even further and bond yields rising faster, investors fear inflation might kick up again. All of these factors combine to make one believe there’s another Great Depression looming on our screens at any given moment without fail.

Advertisement