The U.S. stock market likely faces further losses this year, with equities under growing pressure from lackluster earnings and high interest rates, according to Morgan Stanley.
Michael Wilson, the chief U.S. equity strategist at Morgan Stanley and a longtime Wall Street bear, warned in an analyst note this week that the stock market could continue its decline in March.
“With the equity market showing signs of exhaustion after the last Fed meeting, the S&P 500 is at critical technical support. Given our view on earnings, March is a high risk month for the bear market to resume,” Wilson wrote. “Ultimately, we think this rally is a bull trap.”
He previously suggested that the S&P 500 could tumble to 3,000 points within months, down about 25% from current levels.
The gloomy forecast comes after a brutal year for the stock market, its worst since the 2008 financial crisis. All three indexes tumbled in 2022, snapping a three-year win streak. The Dow Jones Industrial Average ended the year down 8.8%, the best of the three. The S&P 500 sank 19.4% while the tech-heavy Nasdaq Composite plunged 33.1%.
Stocks initially rallied in early 2023, although equities have lost some of that momentum amid sticky inflation and rate-hike fears. As of Thursday afternoon, the S&P is up about 4% from the start of the year but down about 5% from the start of February.
Wilson is not alone in his bearish outlook. Bank of America chief economist Michael Hartnett previously predicted that a “no landing” scenario in the first half of the year – no immediate slowdown in growth but inflation remains above trend – could clobber stocks, sending the S&P down another 7%.
And JPMorgan strategist Mislav Matejka argued in a note last week that equities will not hit bottom until the Federal Reserve concludes its aggressive interest rate hike campaign and starts cutting.
Federal Reserve policymakers already voted to raise interest rates eight consecutive times to a range of 4.5% to 4.75%, and they signaled last month that a “couple more” increases are on the table this year.
But a slew of hotter-than-expected economic data reports, including the blowout January jobs report and a disappointing inflation report that pointed to the pervasiveness of high consumer prices, has raised the specter of a higher peak rate and no rate cuts in 2023.
“With uncertainty on the fundamentals rarely this high, the technicals may determine the market’s next big move,” Wilson said. “We think this rally is a bull trap but recognize if these levels can hold, the equity market may have one last stand before we fully price the earnings downside.”