• Prolonged cycle of interest rate hikes not priced in on the stock market
• Earnings recession in 2023
• monetary policy of the central banks will only have a positive effect in 2024
Morgan Stanley CIO Michael Wilson sees a “significant” earnings recession in store for investors in 2023, with earnings falling as much as 16 percent by year-end. “This divergent earnings path is supported by our models and our view that policy will become more accommodative in 2024, not 2023,” Wilson wrote in a note to clients in early June, according to yahoo!finance. “It is also supported by our thesis that we are in the midst of multiple ‘hotter but shorter’ profit cycles in the context of a broader secular bull market (a ‘boom/bust/boom’ regime)” In 2024 there will then be a “strong upswing”.
As early as February this year, Wilson, known as the Wall Street bear, stressed that prices were miles away from reality. According to Bloomberg, Wilson wrote at the time that the stock market was refusing to recognize that the Federal Reserve’s rate-hiking cycle could last any longer. In February, the Morgan Stanley experts already saw the S&P 500 fall back to 3,900 points by the end of the year and confirmed this assessment in the current report, which would correspond to a decline of around nine percent from the current level of 4,293.93 points (as of: closing price from 08.06.2023).
Irrespective of further interest rate hikes by the Federal Reserve, numerous market experts are currently warning of a further economic slowdown. According to Factset, the quarterly results of the S&P 500 companies have been declining for the second quarter in a row. However, this does not seem to be reflected in stock valuations at the moment. The NASDAQ Composite was even able to increase by around nine percent in the past four weeks. Historically, the S&P 500’s price-to-earnings ratio currently ranks within the top 20 percent of the scale, according to Morgan Stanley’s calculations.
AI hype: Accelerated growth remains limited to individual companies
Even the current trend towards artificial intelligence will not help the broad stock market to regain momentum in 2023, according to Wilson. The shares of the companies at the center of the AI hype – such as the chip giant NVIDIA, which fueled the AI boom with its almost fantastic forecast for the coming quarter – will most likely soar in 2023, but the major indices will not be able to keep up. “While there will no doubt be individual stocks to see accelerating growth this year on the back of AI spending, we don’t think this will be enough to change the course of the overall cyclical earnings trend in any significant way as revenue growth slows and cost pressures remain,” Wilson said, according to yahoo!finance.
Expert recommendation in the cyclical bear market
Morgan-Stanley experts are expecting a tactical correction for S&P 500 stocks as values have already rallied this year. This leads Wilson to conclude that Federal Reserve monetary policy will only become supportive of growth as interest rates cut next year. The experts’ recommendation therefore goes in the direction of the “traditionally defensive sectors”, ie consumer goods, energy suppliers and health care. “We favor defensive positioning for the difficult earnings environment we expect to continue and are looking for sectors and industry groups with a reliable track record of outperforming at the end of the cycle and during earnings recessions,” Michael Wilson wrote to clients.
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