Mike Wilson, Morgan Stanley’s Chief US Equity Strategist, is warning that US stocks are at risk of a 22% slump in the next year.
He believes that current stock valuations and stock indexes do not reflect potential risks to earnings outlooks and economic growth.
“The earnings recession by itself could be similar to what transpired in 2008/2009,” the Morgan Stanley exec wrote in a report on Monday. “Our advice – don’t assume the market is pricing this kind of outcome until it actually happens.”
Wilson argues that a lack of caution could lead to a hard landing for equities and investors.
“We often hear from clients that everyone knows earnings are too high next year, and therefore, the market has priced it,” he wrote. “However, we recall hearing similar things in August 2008 when the spread between our earnings model and the Street consensus was just as wide.”
According to Wilson, ‘We remain overweight equities in Stanley’s Wealth Management portfolios but we think it’s prudent to be cautious.’
He also warned bond investors against taking on too much risk due to expectations of higher interest rates. As such, it is important for both equity and bond investors alike to remain cautious when considering their investments in the current market environment.
Wilson suggested that a stock market reset was necessary for investors to remain profitable. On Friday, he elaborated on this and further noted that current valuations were too high and unsustainable.
Wilson advises paying attention to risk management when investing as it is an important factor in remaining profitable into the future.
Recently Morgan Stanley’s bank team warned that US stocks risk a 22% slump, citing several quarters of protracted downturns in global stocks as well as the overall outlook for the US economy.
The news follows Deutsche Bank’s similar warning about an end to the current recession and suggests that investors should be cautious.
The bank group believes market weakness will be further enhanced by high inflation, which could lead to a fall in global stocks.
Inflation readings have already been on the rise and this has caused investors to become cautious.
Central bankers such as the Federal Reserve have been raising interest rates in an attempt to bring inflation down, but Morgan Stanley analysts believe this may not be enough.
They think higher asset management fees and taxes could also contribute towards further economic growth slowing down, leading to a market slump.
The warning from Morgan Stanley serves as a reminder that investors should remain cautious when it comes to stock investing during periods of high inflation.
Even though central bankers are attempting to keep inflation levels stable with higher interest rates, analysts fear these measures may not be enough if asset prices continue rising too quickly. Investors should therefore consider diversifying their portfolios so they’re not overly exposed to any single asset class or sector, even if it means taking on some additional risks
The firm also cited corporate tax policies and Goldman Sachs’ overweight cash position as factors contributing to the risk of a stock market crash.
Other major financial institutions such as JPMorgan Asset Management have echoed similar warnings about the potential for equity markets to tumble.
As investors look for ways to adjust their portfolios in light of these warnings, they are turning towards alternative investments such as gold or real estate.
The banking unit at JPMorgan Chase has advised clients that it is wise to spread investments across multiple asset classes in order to reduce portfolio risk should stock markets take a dive.
Morgan Stanley’s warning is based on data from the past four decades which suggests that after an extended bull market such as this one, there is a greater chance for larger corrections. Investors should take this warning seriously to protect their portfolios from losses.
Morgan Stanley’s chief US equity strategist, Mike Wilson, is predicting a 22% slump in US stocks due to a dreadful market performance. He believes this is linked to deteriorating corporate profits and an earnings plunge. This could be the start of another financial crisis like what occurred in 2008. Wilson is citing declining operating margins as evidence of the potential for a market bear, and he believes many investors are not prepared for it. As a result, equities that investors were hoping would be profitable may not be so anymore due to these factors, leading to further losses for those who aren’t prepared.
Morgan Stanley’s warning follows the start of earnings season, which is usually a time for analysts to make their consensus earnings predictions for the year.
Morgan Stanley’s prediction of a 22% fall in US stocks is significantly lower than what most other analysts are predicting.
According to Bloomberg Intelligence strategists, many analysts believe that there will be only a small dip in stocks this year and that profit growth will continue into next year.
Deutsche Bank recently issued its own warning and suggested that investors should prepare for a recession as soon as next year due to slowing economic growth. This has been echoed by Morgan Stanley, who are expecting US stocks to suffer due largely to weak corporate profits over the coming quarter-year period.
The bank group has cited concerns about rising costs and slower profit growth as major contributors towards their pessimistic outlook on the stock market.