Wall Street’s top strategist Mike Wilson warns investors to brace themselves for stocks to plummet more than 20%
Stocks could be poised to fall more than 20%, according to one of Wall Street’s most successful strategists – but he warned on Tuesday that investors are not prepared for how bad things could get.
Speaking on CNBC’s Fast Money, Mike Wilson, CIO and chief US equity strategist at Morgan Stanley, said the S&P 500 was susceptible to a 23% decline. This would take the index down from its current 3,900 points to 3,000.
While there is a broad consensus that a recession is looming, Wilson — who was ranked as the No. 1 strategist. 1 stock in the latest Institutional Investor survey — urged traders to take the impact of a possible economic contraction more seriously.
“Even though most institutional clients think we’re probably going to be in a recession, they don’t seem to fear it,” he said. “It’s just a big disconnect.”
Morgan Stanley’s CIO added that the upcoming earnings season would create volatility in markets because many corporate financials would come in below expectations.
“This is another area that investors are a little complacent — costs are rising faster than net income,” he told CNBC. “The full-year estimate should fall. Negative operating leverage is really starting to flow into the income statement off the balance sheet… This is a very underrated development during COVID. We earned a lot during the pandemic because there was positive operating leverage.”
He added: “When we actually talk to people, they talk about a bearish game for the first half. But they’re not really even positioned for it or they don’t think it’s going to be that bad.”
Investors remained bruised through the end of 2022, with US stocks suffering their worst year since the Great Financial Crisis as markets were rattled by the war in Ukraine, persistently high inflation, rising interest rates and economic uncertainty.
While many hope the Federal Reserve will begin winding down its aggressive rate-hike cycle if inflation continues to slow, Wilson said Tuesday he didn’t expect the central bank to take its foot off the pedal just yet.
The story continues
“Our call is largely about earnings and the fact that the Fed will probably not be as responsive to a slowdown as they have been historically,” he explained. “They’re not going to cut rates in a slowdown.”
Will the stock market recover in 2023?
Wilson has long been one of Wall Street’s most vocal bears when it comes to US stocks.
Late last year, he warned investors to brace for the S&P 500 to hit between 3,000 and 3,300 points within the first four months of 2023 — and that’s a view he hasn’t shied away from.
His interview with CNBC came after he said in a research note that corporate earnings forecasts were still too high, while the equity risk premium was still at its lowest level since the start of the 2008 financial crisis. he argued in the note, meant the S&P 500 could fall well below the 3,500-point level as markets priced in a recession — Wilson predicted a 22% drop to around 3,000.
The S&P is currently trading well above the levels Wilson warns could be reached, with the index closing at more than 3,900 on Tuesday.
Wilson’s year-end price target for the S&P 500 is 3,900.
Although Wilson’s forecast is one of the most pessimistic on Wall Street, many of the other major players expect a less-than-bullish market this year.
A compilation of public forecasts compiled by Fortune late last year showed that the average investment banker’s price target for the S&P in 2023 was about 4,000 points.
A rise from the S&P 500’s 2022 close of 3,839.50 to about 4,000 would mean a positive increase from last year’s annual return — when it lost 18%, according to NYU — but would still be well below the average annual return of the S&P of 16.4%. between 2009 and 2021.
Others taking a cautious stance include Barry Bannister, chief equity strategist at Stifel, who predicted in a research note Monday that the S&P 500 could jump 10% higher by mid-June to reach 4,300 points – but warned that the rally would precede a decade of flat stock markets.
In November, strategists at Goldman Sachs warned that the bear market was far from over, predicting that the S&P 500 would end 2023 at 4,000 points — up just 2% from Tuesday’s close.
This story originally appeared on Fortune.com
More from Fortune:
Air India criticized for ‘systemic failure’ after unruly male passengers flying business class urinated on woman traveling from New York
Meghan Markle’s real sin that the British public can’t forgive — and Americans can’t understand
“It just doesn’t work.” The world’s best restaurant is closing after its owner calls the modern dining model ‘unsustainable’
Bob Iger simply put his foot down and told the Disney employees to go back to the office