Senior Analysts Warn S&P 500 Could Plunge As Stocks Fall Next Year

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Analysts warn that the stock market could be close to a major pullback, with main indexes falling next year.

The US financial multinational Morgan Stanley and Bank of America predict that the S&P 500 will fall to the low 3000s in 2023.

Mike Wilson, chief US equity strategist and chief investment officer for Morgan Stanley, said his target price for the S&P 500 next year was 3,900. He warned that US companies are preparing to unleash downward earnings revisions that will impact the stock market.

Speaking to the media on Tuesday, Mr. Wilson said that was “the path,” explaining that nobody cared what would happen in 12 months because investors had to deal with the next three to six months.

The expert added that that’s where analysts believe there is a “significant downside” but clarified that it would be “a wild ride” even though seeing the benchmark index reach 3,900 might sound like a boring period.

Mr. Wilson also predicts that the S&P 500 could fall around 24% from Tuesday’s close in early 2023.

Investors should expect the S&P to hit between 3,000 and 3,300 at some point, likely in the next year’s first four months when the slowdown in earnings revisions is expected to reach its crescendo, he added.

On Tuesday, the S&P 500 lost 0.16% to end at 3,957.63 in its third straight day of decline for a 17% drop year-to-date. Morgan Stanley’s chief investment officer also believes the benchmark index will close at 3,900 this year.

Mr. Wilson insisted the bear market was not over and said there would be “significantly lower” lows if the firm’s earnings forecast is correct.

Big companies will face the most damage, but it isn’t limited to just those operating in the tech industry. “It could be consumer. It could be industrial,” he added.

The strategist explained that the money had gone into these other areas when those companies’ stocks hit a rough patch last month. Therefore, part of the rally has been caused only by the repositioning from the money movement.

It was not the first time Mr. Wilson warned of a market pullback. In July, he predicted the S&P 500 would likely experience another downward move after hitting a low that month.

Later, on October 13, the benchmark index plunged, hitting 3,491.58, a 52-week low.

However, Mr. Wilson clarified that he doesn’t believe this is a time to “sell everything and run for the hills” because the pullback is not expected to occur until earnings decline in January and February.

Over the next few weeks, bullish tailwinds could propel shares higher, Mr. Wilson stated, adding that he still believed the current tactical rally had legs until the end of the year.

Meanwhile, Bank of America Global Research’s strategists said the S&P 500 might not go anywhere a year from today.

In their annual outlook released Monday, BofA equity strategists said their price target for the S&P was 4000 by late 2023, accounting for a rise of less than 1% from its Monday close of 3,963.94.

Experts said the S&P 500 would not report significant permanent gains in the coming year as the benchmark index’s annual earnings per share are expected to hit $200 after a 9% drop next year.

In other words, BofA estimates that annual earnings per share will be 15% lower than current estimates.

Also, in the bear case scenario, the bank’s strategists expect the S&P to fall as low as 3,000. However, they are more optimistic than other analysts regarding earnings.

On Monday, US equity strategy and quantitative strategy head Savita Subramanian said they were more “sanguine” on earnings due to the health of corporate and consumer balance sheets.

However, BofA strategists explain that eroding profit margins drive the short-term bear trend, as wage growth will outpace companies’ ability to raise prices.

In addition, the bank’s latest research showed that only half of S&P 500 companies report real sales growth, posting underlying sales figures much lower than headline numbers driven by inflation.

While pricing power accelerating faster than wages often creates the best environment for equity investments, this could be the worst environment for stock investors as wages are sticky and high, demand has started to decline, and prices are falling, Ms. Subramanian added.

The still-crowded mega-caps, which have been hit hard by this year’s slump in stocks, may also hamper gains for most companies in the index.

Ms. Subramanian also said that the “wealth effect,” a phenomenon that describes when consumers spend more as the value of their assets rises, could also be a big risk for the market in 2023.

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