Morgan Stanley’s chief investment officer says inflation has peaked but 2023 will still be hard stocks
Morgan Stanley’s chief investment officer says inflation will only fall over the next 12 months after peaking at 9.1% in June. But stocks that have already taken a hit during the current downturn are vulnerable to more turmoil.
“Inflation has peaked,” Mike Wilson told CNBC. “We’re pretty confident that next year is going to be pretty tough. And the real question is, what does that mean for growth?”
Wilson, who recently earned that Institutional Investor‘s top equity strategist said the company’s growth is the second part of the bear market story.
“The growth slowdown isn’t priced in yet,” said Wilson, who is also Morgan Stanley’s chief US equities strategist. “And that will determine the winners. It’s a stock-picking game, and there will be some companies that can pull it off. But we are quite pessimistic about the index level.”
Morgan Stanley projects earnings for S&P 500 companies will be 16% below consensus in 2023. Wilson, who is known to be a pessimist, said earlier this month that the S&P could fall about 25% below current levels by the end of March 2023.
“We’re not looking for a 5% miss, we’re looking for potentially 15% to 20% – it could be that significant,” he said of the earnings. “Most investors agree. This is not new news. People expect profits to fall, but it depends on the size of that drop and how quickly it will happen. We think that’s where the surprise lies.”
Wilson said falling inflation will hurt corporate profit margins regardless of whether the economy enters a recession – echoing his comments earlier this month.
“Inflation has pushed up profits. So if inflation goes down next year… it’s bad for stocks,” Wilson previously told Bloomberg. “That’s going to squeeze margins … and that’s the part of the story that we think many investors are underestimating.”
US annual inflation has already slowed to 7.1% in November. It comes after the Federal Reserve raised interest rates several times this year before slowing its pace to 50 basis points from a series of 75 basis point hikes this week.
Some companies are already feeling the pain of a faltering and uncertain economy. Amazon and Facebook parent Meta both underperformed in the third quarter, with Amazon underperforming Wall Street’s earnings and revenue estimates and Meta reporting revenue and earnings declines.
“Some companies are already in earnings recessions,” Wilson said. “We know [that] Every quarter this year has been disappointing, but we don’t have guidance for 2023 yet because companies have no reason to talk about 2023 until we get there. They keep postponing this, but in January they have to deal with it.”
If forced to do so, they will lower their financial forecasts, he said – which could create an opportunity for investors to buy on a dip. Either way, lower returns are bound to have a negative market reaction.
“The bear market was fueled by Fed policy, higher interest rates and inflation concerns,” Wilson said. “That relieved us, and that’s why we rallied. But that’s a trade because ultimately, stocks will care about the earnings drop as much as they care about the Fed pausing or even going ahead for a few more months.”
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