According to a Bearish Analyst, Stocks Set to Move Lower as Earnings Decline

A top bearish analyst from Wall Street believes that the January impact and other factors that helped markets in the first few weeks of the year have started to dissipate.

Mike Wilson, Chief U.S. Equities Strategist, and Chief Investment Officer at Morgan Stanely, wrote in a letter to clients dated Monday that “the door is still very much open” for U.S. stocks to fall as investors wrestled with an earnings picture that has significantly worsened during the month of January.

Since the beginning of the year, expectations for corporate earnings in 2023 have continued to decline. Indeed, as of the end of last month, forecasts for S&P 500 earnings-per-share growth in 2023 were negative for the first time since 2020, and only the sixth time since 2000.

Precedents

Previous occurrences took place in 2001, 2008, 2015, and 2020 and, as Wilson and his colleagues demonstrated, it always preceded additional declines in the S&P 500.

FactSet data show that calendar-year EPS forecasts for 2023 declined 2.5% in the first quarter to $224.88. Corporate earnings would be decreasing rather than expanding at this level.

Equity price declines occur when projected EPS growth becomes negative.

According to FactSet statistics, expectations for corporate earnings growth have fallen by 2.5% since the beginning of January. This is the greatest drop to begin a year since January 2016.

This dimming occurred when corporations announced their fourth-quarter results for 2023.  According to FactSet, unless there is a quick recovery, this will be the first such fall since the third quarter of 2020.

Cutting Rates

However, while previous periods of deterioration coincided with the Federal Reserve cutting interest rates to protect the economy, Wilson stated that the Fed is still hiking interest rates this time around, with no plans to begin cutting until 2024, according to the central bank’s official projections.

In other words, this earnings recession has not been priced,” he explained.

To be sure, Wilson believes that, aside from the underlying earnings outlook, there are other reasons to be pessimistic about US stocks.

In his note, he also mentioned positioning, pointing out that institutional investors have already rebuilt their stockholdings, which could limit further gains. Wilson also believes that the Dow Jones Industrial Average’s recent underperformance indicates that markets are about to deteriorate once more.

Next Leg Lower

Wilson predicted that the S&P 500 will reach a new cycle low at 3,000 by the end of the first quarter. He now anticipates that the drop will occur eventually, albeit it may take longer.

Morgan Stanley’s bearish analyst, Mike Wilson warns that the stock market’s January boom may come to an end this week, and his credentials speak for itself.

Wilson is Morgan Stanley’s leading equity strategist in the United States. He received praise for correctly forecasting the 2022 market and bond selloff, which saw the S&P 500 plummet 19.4%, the largest calendar-year decrease since 2008.

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