U.S. equities face much sharper declines than many pessimists expect with the specter of recession likely to compound their biggest annual slump since the global financial crisis, according to Morgan Stanley strategists.
Michael Wilson — long one of the most vocal bears on U.S. stocks — said in a research note that while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are still too high and the equity risk premium is at its lowest since the run-up to 2008.
That suggests the S&P 500 could fall much lower than the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, he said.
"The consensus could be right directionally, but wrong in terms of magnitude," Wilson said, warning that the benchmark could bottom around 3,000 points — about 22% below current levels.
The strategist — ranked No. 1 in last year's Institutional Investor survey — isn't alone in his view that earnings expectations are too optimistic. His counterparts at Goldman Sachs Group Inc. expect pressure on profit margins, changes to U.S. corporate tax policies and the likelihood of recession to overshadow the positive impact from China's economic reopening.
One of the factors driving Wilson's bearish view is the impact of peaking inflation. U.S. stocks rallied last week amid signs that a modest ebbing in price pressures could give the Federal Reserve room to potentially slow its interest-rate hikes.
