More downside ahead as inflation hurts consumers

  • The stock market has yet more downside ahead as persistent inflation weighs on consumer confidence, according to Mike Wilson of Morgan Stanley.
  • The firm forecasts that the S&P 500 will trade another 16% lower over the next year in its bear scenario.
  • “We continue to believe that the US equity market is not priced in for this slowdown in growth from current levels,” Wilson said.

The stock market is not out of the woods yet, even taking into account its current decline, according to Morgan Stanley chief investment officer Mike Wilson.

In a note on Tuesday, Wilson reiterated his view that persistent inflation and a slowdown in corporate earnings mean there is still more downside for stocks.

“The key implication here is that the benefits of early-to-mid-cycle positive operating leverage are behind us, and earnings growth is likely to slow, driven by margin compression and slowing top-line growth. Wilson said.

In his base case scenario, Wilson expects the S&P 500 to trade at 3,900 a year from now, representing a potential 3% drop from current levels. But in Wilson’s bearish scenario, the S&P 500 would trade 16% lower at 3,350.

“We continue to believe that the US equity market is not priced in for this growth slowdown from current levels. In fact, under our fair value framework, the S&P 500 is still mispriced for the growth environment.” current,” Wilson said.

That’s because inflation has been exacerbated by Russia’s war on Ukraine and China’s sporadic COVID-19 lockdowns, continuing to weigh on “already depressed consumer sentiment.”

Meanwhile, rising labor and input costs could be tricky and put downward pressure on corporate profit margins, and tighter monetary policy is already having a negative economic impact, especially on the custom housing market. that mortgage rates skyrocket.

All in all, the current market and economic environment validates Wilson’s long-standing view that a combination of “fire” and “ice” would hit risky assets, while the fire is a nod to monetary policy tightening. by the Federal Reserve and the ice refers to a slowdown in corporate profits.

Wilson expects S&P 500 earnings per share to grow just 8% in 2022, 5% in 2023 and 0% in 2024. That compares with analyst estimates of 10% growth in 2022, growth of 10% in 2023 and a growth of 9%. growth in 2024.

“Bottom line: ‘Fire’ and ‘Ice’ persist as the Fed continues to tighten policy in a slow growth environment. Expect slower earnings growth, lower multiple and elevated gains.”


Wilson concluded.

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