Morgan Stanley’s Wilson Says S&P 500 Could Drop 26% in Months

(Bloomberg) -- Expensive US equities are flashing a major warning sign that could see the S&P 500 sliding as much as 26% in the first half of this year, according to Morgan Stanley strategists.

Most Read from Bloomberg

You Want at Least $3 Million in Savings to Retire Comfortably

The Biden White House Operated Under Cloak-and-Dagger Secrecy to Plan His Ukraine Trip

US-China Meeting Only Worsens Tensions Over Balloon, Russia

Stocks Muted, US Futures Fall as China Bets Fade: Markets Wrap

Recent economic data suggest the economy might be able to dodge a recession, but that has also taken the possibility of a Federal Reserve pivot off the table, according to a team led by Michael Wilson — ranked No. 1 in last year’s Institutional Investor survey when he correctly predicted the selloff in stocks. That’s left rates higher across the curve and stocks more expensive than at any time since 2007 by the measure of equity risk premium, they added.

Equity risk premium has entered a level known as the “death zone”, making risk-reward very poor especially as the Fed is far from ending its monetary tightening and earnings expectations remain 10% to 20% too high, Wilson said. “It’s time to head back to base camp before the next guide down in earnings,” he wrote in a note on Monday.

The strategists hold a view that the S&P 500 can slide to as low as 3,000 — a 26% drop from its most recent close — in the first half of 2023. That’s “very much out of consensus at this point,” especially as active institutional and retail investors are more bullish than they have been in over a year, they said.

Most Read from Bloomberg Businessweek

The Staged Bomb Scare That Backfired on Mumbai’s Notorious Cops

Zantac’s Maker Kept Quiet About Cancer Risks for 40 Years

The World’s War Machine Is Running Low on Ammunition

How to Make Sure Your Resume Isn’t Overlooked — Without Lying

Fear Made John McAfee Rich. It Also Ruined Him

©2023 Bloomberg L.P.
Click Here To Get Funded!