Stocks are facing risks as the Fed continues to keep monetary policy tight, Morgan Stanley’s Mike Wilson said.
That’s because markets are likely underpricing earnings downside, he said in a note.
Wilson previously has warned of an earnings recession that could rival 2008.
Stocks are headed into risky territory as the Fed keeps its monetary policy tight, according to Morgan Stanley’s chief stock strategist Mike Wilson.
Wilson, who has previously sounded the alarm for a 2008-like earnings recession to hit the market, warned there could be more downside risks as the Fed continues to keep monetary policy restrictive.
While the central bank has infused the banking system with more liquidity after the collapse of Silicon Valley Bank in March, the containment of that stress so far suggests there’s no need to relax monetary policy any further.
“Markets often reprice late in the cycle when they realize that Fed policy is not accommodative enough to compensate for the slowing growth backdrop,” Wilson said in a note on Monday. “While the containment of the regional banking stress is clearly a positive in and of itself, it may also mean that policy expectations for ’23 may become less accommodative – via both the liquidity channel and the rates channel.”
Central bankers have raised interest rates over 1,700% in the past year to combat inflation, but prices are still well-over the Fed’s 2% target.
Inflation, high rates and waning liquidity in the market weighed heavily on stocks in 2022, with the S&P 500 slumping 20% last year as firms battled tighter financial conditions.
For the first quarter, the consensus view on Wall Street is for a 9% decline in earnings growth in S&P 500 companies, followed by just a 4% drop in the second quarter, with earnings growth returning the second half of the year.
“It’s not surprising that investors have been unwilling to sell into 1Q results as they believe this is as bad as it gets. We would agree with that conclusion if we believed the consensus forecasts,” Wilson warned. “Unfortunately, our forecasts are more pessimistic, and we don’t expect the trough rate of change EPS growth quarter until 3Q or 4Q.”
Morgan Stanley previously said earnings estimates are at least 20% overblown, forecasting in February that stocks could plunge another 26% over the next few months.
Other commentators have forecasted a similar fate for stocks this year. Stocks could tumble at least 15% in event of a mild recession, according to JPMorgan strategists.
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Source: https://finance.yahoo.com/news/stocks-headed-risky-territory-fed-004804670.html