A Morgan Stanley strategist warned Monday that U.S. equities are facing a sharp decline, with a recession likely to compound the ongoing financial crisis, according to Bloomberg.
A research note issued by financial strategist Michael Wilson said that despite investors being generally pessimistic about future economic growth, corporate profit estimates remain far too high with an equity risk premium at its lowest since the lead-up to the 2008 financial crisis, Bloomberg reported. The S&P 500 could fall far lower than 3,500 to 3,600 points, which is what the market is currently estimating in the case of a mild recession, Wilson reportedly added.
“The consensus could be right directionally, but wrong in terms of magnitude,” Wilson said, according to the outlet. He predicted the benchmark could hit as low as 3,000 points, roughly 22% below the current level. Fellow strategists at Goldman Sachs Group Inc. and Deutsche Bank Group AG echoed similar concerns, according to Bloomberg. Deutsche Bank strategists reportedly added stocks could still recover through the fourth quarter, in part due to low investor sentiment.
An overview of global inflation. Still high in 2022 mainly led by food and energy components.
Source: Morgan Stanley pic.twitter.com/xSOYDfYX4X
— Sachin Chaudhary (@Tweets_Sachin1) January 9, 2023
Peaking inflation is a main factor driving Wilson’s perspective, according to Bloomberg. Wilson is a week behind famous investor Michael Burry, who made a far more significant and detailed prediction at the start of 2023. “Inflation peaked. But it is not the last peak of this cycle. We are likely to see CPI [Consumer Price Index] lower, possibly negative in 2H [second half] 2023, and the US in recession by any definition,” Burry wrote Jan. 1 on Twitter. “Fed will cut and government will stimulate. And we will have another inflation spike. It’s not hard.”
Burry is best known for his work in the run-up to the 2008 financial crisis, which was portrayed in the hit film “The Big Short.” (RELATED: Michael Burry Sells All But One Stock, Warns Of Market Crash)
A majority of major financial institutions are anticipating a recession in 2023. Burry, along with the likes of Nouriel “Dr. Doom” Roubini and billionaire investor Stanley Druckenmiller, have made similar predictions for months. It’s unclear why some banks are only now warning their customers.