S&P 500 decline ‘will be much worse than what most investors are expecting’

By Senad Karaahmetovic

Morgan Stanley equity strategists are growing increasingly confident in their forecast that U.S. stocks will continue to head lower in the coming months.

“Case closed,” says the strategists about the recent bear market rally that practically ended last week.

“While we called for the end of the tactical rally two weeks ago, we think last week’s price action provided the technical reversal to confirm it,” they wrote in a client note.

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

“In down years like 2022, the ability/willingness to do that is lower and the trend is down, which reduces the odds of a year end rally lasting all the way until December 31st. This is the other reason we pulled the plug on our tactical rally call. With last week’s technical reversal so clear, we think the setup is now more bearish than bullish,” the strategists added.

They are telling clients to sell rallies into year-end and Q1 but note that it is likely to get more challenging when it comes to predicting short-term moves.

The strategists reiterated their $195 forecast for the earnings, which remains well below the consensus of $231. They are even leaning toward Morgan Stanley’s bear case forecast of $180 for ’23 EPS which suggests “the earnings recession by itself could be similar to what transpired in 2008/2009.”

“If our EPS forecasts prove to be correct, the price declines for equities will be much worse than what most investors are expecting,” they added.

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