Stocks could be about to tumble more than 20%, according to one of the most successful strategists on Wall Streetbut he warned on Tuesday that investors arent prepared for how bad things could get.
Speaking on CNBCs Fast Money show, Mike Wilson, CIO and chief U.S. equity strategist at Morgan Stanley, said the S&P 500 was susceptible to a drop of 23%. That would see the index nosedive from its current 3,900 points all the way down to 3,000.
While there is a broad consensus that a recession is looming, Wilsonwho was ranked the No. 1 stock strategist in the latest Institutional Investor surveyurged traders to take the impact of a potential economic contraction more seriously.
Even though a majority of institutional clients think were probably going to be in a recession, they dont seem to be afraid of it, he said. Thats just a big disconnect.
The Morgan Stanley CIO added that the coming earnings season would create volatility in the markets because many corporate financials were likely to come in below expectations.
Thats another area investors are being a little bit complacentcosts are increasing faster than net revenues, he told CNBC. The full-year estimate has got to come down. Negative operating leverage is really starting to flow through to the income statement from the balance sheet This is a very underappreciated development during COVID. We over-earned during the pandemic because there was positive operating leverage.
He added: When we actually talk to people, they talk a bearish game about the first half. But theyre not really either positioned for it or they dont really think that its going to be that bad.
Investors were left bruised by the end of 2022, with U.S. stocks suffering their worst year since the Great Financial Crisis as markets were roiled by the war in Ukraine, persistently high inflation, interest rate rises and economic uncertainty.
While many are hoping the Federal Reserve will begin to wind down its cycle of aggressive rate hikes if inflation growth continues to slow, Wilson said on Tuesday that he wasnt expecting the central bank to take its foot off the pedal just yet.
Our call is predicated mostly on earnings and the fact that the Fed probably isnt going to be as reactive to a slowdown as they have been historically, he explained. Theyre not going to be slashing rates into a growth slowdown.
Will the stock market recover in 2023?
Wilson has long been one of Wall Streets most vocal bears when it comes to U.S. equities.
Toward the end of last year, he warned investors to brace for the S&P 500 to reach a level between 3,000 and 3,300 points within the first four months of 2023and its a view he hasnt shied away from.
His interview with CNBC came after he said in a research note that corporate earnings forecasts were still too high, while the equity risk premium was still hovering at its lowest since the lead-up to the 2008 financial crisis. This, he argued in the note, meant the S&P 500 could tumble far below the 3,500-point level being priced into markets in anticipation of a recessionWilson predicted as much as a 22% fall to around 3,000 points.
The S&P is currently trading far higher than the levels Wilson is warning could be reached, with the index closing at more than 3,900 points on Tuesday.
Wilsons year-end price target for the S&P 500 is 3,900.
Although Wilsons prediction is one of the most bearish on Wall Street, many of the other big players are expecting a less-than-bullish market this year.
A compilation of public forecasts put together by Fortune at the end of last year showed that investment banks average price target for the S&P in 2023 was around 4,000 points.
A rise from the S&P 500s 2022 close of 3,839.50 to around 4,000 would imply a positive bounce from last years annual returnwhen it lost 18%, according to NYUbut it would still be far lower than the S&Ps average annual return of 16.4% between 2009 and 2021.
Others taking a wary stance include Barry Bannister, chief equity strategist at Stifel, who predicted in a research note on Monday that the S&P 500 could jump 10% higher by mid-June to reach 4,300 pointsbut warned that the rally would precede a decade of flat stock markets.
In November, strategists at Goldman Sachs warned that the bear market wasnt over yet, predicting the S&P 500 would end 2023 at 4,000 pointsan increase of just 2% from Tuesdays close.
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