- The big three Wall Street banks expect the S&P 500 to top 20% at some point next year.
- With the Fed raising interest rates, US stocks face downside risks, lower earnings forecasts and liquidity risks.
- Here’s what Morgan Stanley, Bank of America and Deutsche Bank are saying about what could send shares lower.
The three top Wall Street banks are singing from the same bearish hymn sheet as each predicts US stocks will fall more than 20% next year.
A liquidity crisis caused by the Federal Reserve for Bank of America could put pressure on the S&P 500 stock index. Meanwhile, Morgan Stanley and Deutsche Bank said lower earnings forecasts and a U.S. recession could trigger the sell-off.
The benchmark index rose to 4,000 from its October low, but analysts believe the rally is just a reprieve in the bear market it has entered this year.
Aggressive interest rate hikes by the Federal Reserve to combat inflation hitting a 40-year high, fears that its tightening could push the U.S. into recession, and the fallout from Russia’s aggression in Ukraine dragged the S&P 500 down 15% in 2022.
It’s payback time for stocks that have grown accustomed to decades of low interest rates and easy money from fiscal and corporate stimulus. Where the S&P 500 is headed and why, according to the big banks.
Morgan Stanley probably expects the S&P 500 to fall 24% to between 3,000 and 3,300 in the first four months of 2023. Mike Wilson, its chief U.S. equity strategist, sees a glut of companies due to the recession lowering earnings forecasts. it hits stock prices.
“That’s when we think the slowdown in earnings revisions will reach its crescendo,” Wilson told CNBC.
An economic recession means that businesses and consumers cut back on spending, which causes corporate profits to fall. Higher interest rates increase the cost of borrowing and therefore make it more expensive for companies to invest.
“The bear market is not over. “If our earnings forecast is correct, we have significant downside.”
Wilson sees the S&P 500 finishing 2023 near 3,900, but predicted a high level of volatility in the market.
“So while 3,900 sounds like a really boring six months — no, it’s going to be tough. It’s going to be a wild ride,” Wilson said. He added that lower earnings would cause severe pain not just for tech stocks, but for larger cap stocks.
Bank of America
According to Bank of America, markets will be depressed next year and economic growth will decrease by 0.4% in the first quarter.
He also predicts that the S&P 500 could fall to 3,000, a 24% loss from current levels, as companies are forced to cut profit forecasts. This would mark a new low during the prevailing bear market period.
But there’s another risk: The Fed’s quantitative easing (QT) — where it cuts about $95 billion of Treasuries and mortgage-backed securities from its $9 trillion balance sheet every month — could badly disrupt market liquidity.
Bank of America said the coming recession will be different, in part because it attributes the “biggest bubble” not to consumers and businesses, but to “monumental, unprecedented leverage risk in governments and central banks.” Given that the Treasury market is fed by equity prices, this can lead to liquidity risks in singles like the S&P 500.
The bank also expects the benchmark index to end 2023 at 4,000, but is subject to price swings along the way.
In its 2023 forecast, Deutsche Bank said it expects global stocks to fall sharply as a severe and prolonged recession hits the US economy. But he sees the decline in US stocks coming in the middle of the year, not the first few months.
It predicts the S&P 500 will rise to 4,500 in the first half, then fall more than 25% in the third quarter as central bank tightening pushes the economy into a full-blown recession. This would take the index to 3,375.
“We read that the Fed and ECB are fully committed to getting inflation back to the desired level over the next few years,” David Folkerts-Landau, chief economist at Deutsche Bank, wrote in a note.
“While the associated costs may be lower than in the past for the reasons we have outlined, this will not be possible without at least moderate economic downturns and significant increases in unemployment in the US and Europe,” he said.
Deutsche Bank also weakened in corporate profits, seeing earnings per share fall to $195 from an average of $222.
His team also sees stocks recovering by the end of 2023, as long as the downturn doesn’t last more than a few quarters. According to the bank, the S&P 500 should climb back to 4,500 by the end of the year.