Morgan Stanley’s Mike Wilson is telling traders to brace for a winter downdraft.
He warns S&P 500 is susceptible to a 23% drop — bringing it to three,000.
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“Even though a majority of institutional clients think we’re probably going to be in a recession, they don’t seem to be afraid of it,” the agency’s CIO and chief U.S. fairness strategist advised CNBC’s “Fast Money” on Tuesday. “That’s just a big disconnect.”
Wilson expects earnings season, which kicks off with financials on Friday, will jolt the market by coming in sharply under expectations. He believes traders will probably be stunned by how dramatically earnings want to regulate.
“That’s another area investors are being a little bit complacent,” he stated. “Costs are increasing faster than net revenues.”
Wilson contends quarterly outcomes will probably kick off a 2023 reset on Wall Avenue.
“The full-year estimate has got to come down,” he added. “Negative operating leverage is really starting to flow through to the income statement from the balance sheet… This is a very underappreciated development during Covid. We over-earned during the pandemic because there was positive operating leverage.”
And, traders may get hit with a double whammy because of the timing of the following Federal Reserve rate of interest determination on Feb. 1. Wilson anticipates the Fed will not appease traders by signaling plans to pivot.
“Our call is predicated mostly on earnings and the fact that the Fed probably isn’t going to be as reactive to a slowdown as they have been historically,” Wilson stated. “They’re not going to be slashing rates into a growth slowdown.”
His S&P 500 year-end value goal is 3,900, which is second lowest on the Avenue. With simply six buying and selling days within the books, the index is up 2% thus far this yr and greater than 12% because the Oct. 13 low.
“When we actually talk to people, they talk a bearish game about the first half. But they’re not really either positioned for it or they don’t really think that it’s going to be that bad,” stated Wilson, who has been defensively positioned since final yr.