S&P 500 decline ‘will be a lot worse than most investors expect’

©Health & Fitness Journal. S&P 500 decline ‘will be much worse than most investors expect’ – MS Wilson

By Senad Karaahmetovic

Morgan Stanley’s equity strategists are becoming increasingly confident in their forecast that US stocks will continue to trend lower in the coming months.

“Case closed,” say strategists of the recent bear market rally that virtually came to an end last week.

“While we called for an end to the tactical rally two weeks ago, we believe last week’s price action provided the technical reversal to confirm this rally,” they wrote in a note to clients.

They see more selling into year-end due to seasonality as money managers are less inclined to chase markets higher in the final weeks of 2023.

“In bad years like 2022, the ability/willingness to do so is lower and the trend is down, reducing the likelihood of a year-end rally that lasts through December 31st. This is the other reason we pulled the plug on Tactical Rally Call. With the technical reversal being so clear over the past week, we think the setup is now bearish rather than bullish,” the strategists added.

They advise clients to sell rallies through year-end and the first quarter, but note that predicting short-term moves is likely to become more difficult.

Strategists reiterated their earnings forecast of $195, which remains well below the consensus of $231. They are even biased towards Morgan Stanley’s $180 EPS 23 bear-case forecast, which suggests that “the earnings recession itself could be similar to 2008-2009.”

“If our EPS forecasts prove correct, stock price declines will be much worse than most investors anticipated,” they added.

Bottom line, strategists remain “decidedly” bearish on US equities and see the S&P 500 falling to the lower end of the 3000-3300 range.