More Market Downside?
As reported Tuesday, the annual inflation rate was 7.1% for the 12 months ending November 2022. The markets loved what they saw. With the slightly lower level, investors see the Fed winning the fight against inflation.
However, that is old news. According to Morgan Stanley, US stocks are in for a world of pain in the first quarter of 2023. Mike Wilson of Morgan Stanley said investors need to shift their attention away from high inflation and the Federal Reserve. Instead, investors need to focus on the looming decline in corporate earnings.
Tomorrow's news, according to Wilson, is ongoing profit margin compression and the looming decline in earnings power. According to data from Bloomberg, the average 2023 EPS estimate for the S&P 500 is $215. Wilson sees $195, and that's not yet priced into the stock market.
Wilson said that "Only ~1/3 of the index has seen 2023 earnings estimates fall more than 10%. This leaves plenty of room for estimates to be cut further and the downward revisions have only just begun.
With Wilson’s big earnings decline, he also sees a big decline in the S&P 500, with the index falling to as low as 3,000 in the first quarter of next year. That would be a decline of about 24% from current levels.
Now, the silver lining to Wilson's bearish market views is that this is the "final chapter" to the current bear market. It’s just no one knows how long this chapter will last.