The S&P 500 must fall another 15% -20% to mark a downturn, says Mike Wilson at Morgan Stanley

The price is not correct.

This is the verdict from Morgan Stanley and Goldman Sachs strategy analysts, who warned as a new week began that the stock market was not fully priced in a recession. And this like the US SPX shares,
+ 0.19%
started well, as trading resumed after the holidays on Monday in June.

“In our view of lower multiples and profits now greater consensus, markets are fairer prices. However, it does not rate the risk of a recession, in our view, which is 15-20% lower, or about 3,000, “said Mike Wilson, Morgan Stanley’s chief stock strategist in the US and one of the most declining voices on Wall Street. this year. , in a note on Tuesday. “The Bear market will not end until the recession arrives or the risk of one is eliminated.”

Reading: Elon Musk joins a choir of Wall Street meteorologists in predicting a recession in the US

Wilson sees much of Wall Street still assuming much higher price-to-earnings ratios for the S&P 500 target price at the end of the year. His bank was “very consensual” in 2022 with a forecast for valuations to fall by 20% plus – they have now fallen by 28% year on year. But Morgan Stanley MS,
Analysts continued to lower their valuation as bond yields increased, with the current index of 15.3 P / E incorporating a share capital risk (ERP) of 330 basis points, which in his opinion is very low.

Wilson would like to see the ERP at 370 basis points, which would let the S / P 500 P / E index fall to 14 times, if the bond yields TMUBMUSD10Y,
and earnings estimates are stable. ERP represents the extra return investors expect on higher-risk stocks than risk-free bonds.


Some of Wilson’s thoughts were echoed by Goldman Sachs chief stock analyst Peter Oppenheimer, who sees market pricing at the risk of a mild recession rather than a medium or deep contraction. He sees the current bear market as a cyclical and a function of the business cycle, according to a Goldman Sachs GS,
research note Tuesday.

“Most bear markets end when economic conditions are still bad, but there is a sense that they are no longer deteriorating at the same rate,” Oppenheimer told customers in the note. “Even if yields do not rise much further in the end, it seems likely that markets will at least assess the risk they will take before we can see a real recovery.”

“US economic conditions are not really that tight by historical standards, so either interest rates need to rise further or markets need to revalue risk, which would work as a tightening anyway,” he said.


The S&P 500 tends to lose a third of its value, on average, around a recession, according to RBC Capital Markets.

“The average drop was 32%,” RBC analysts led by US chief stock strategist Lori Calvasina said in a note on Tuesday. “This kind of drop will drive the S&P 500 to 3,262 this time.”

The median top drop for the S&P 500 around a recession is 27%, which would drag the S&P 500 to 3,501 points, the note shows.

“The 3500 area is a big test of support and stress for a global uptrend set by the 200-week rising moving average and the 50% reversal of the rally from March 2020 to January 2022, according to a market analysis note. by BofA. Global Research dated June 20.

The US stock market traded up sharply on Tuesday afternoon, with the S&P 500 rising 2.8% to around 3,777, according to FactSet data, in the last audit. The index has fallen about 21% this year based on Tuesday afternoon trading.

“Last week we were on the road talking to investors in two different areas in the US,” RBC analysts said. “Most of them had moved away from discussing whether a recession was coming and were thinking about when it would start, how long it would last, how deep the situation would go on the other side.”

The meetings were mainly with “only institutional investors that we would consider longer and focused on fundamental stock pricing,” according to their note.

Several of the investors told RBC that they had already “cut the edges and stuck with higher quality names that they like in the long run,” analysts said. “Many also told us that they already had cash balances that were much higher than usual.”

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