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The S&P 500 has been crushed in a widespread sell-off this month and the benchmark is likely to fall further if the economy goes into recession, according to Morgan Stanley analysts.
In a recent analyst note, Morgan Stanley strategists led by Mike Wilson said the risks of a fall have increased considerably and that stocks could fall 20% more if economic growth stops.
“Right now, a recession is no longer just a tail risk given the Fed’s situation with inflation,” Wilson wrote in the analyst’s note. He predicted a 35% chance of falling over the next year, a sharp increase from his previous estimate of 20%.
The index has already fallen in recent weeks due to concerns higher-than-expected inflation, rising interest rates and the darkening economic outlook continue to weigh on the market. The S&P 500 has been down about 21% since late 2021, officially in bearish territory, but Wilson said markets aren’t really putting prices on the real threat of a recession.
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Traders are trading on the New York Stock Exchange (NYSE) on June 10, 2022 in New York City. ((Photo by Spencer Platt / Getty Images) / Getty Images)
If the U.S. economy begins to shrink, the S&P 500 is likely to fall sharply to about 3,000, 20 percent below current levels, according to Wilson.
Even if the economy manages to escape a recession, Wilson sees more downside for equities: the S&P benchmark is likely to fall between 7% and 10% more, as markets will digest what they are probably poor corporate profits.
“We recognize that a lot of pain has already been inflicted during this bear market. However, we still cannot be optimistic,” he said in the note. “We see a pretty poor risk reward over the next 3-6 months with a risk of recession rising in the face of very stubborn inflation readings.”
The analyst’s note arrives just a week after the The Fed voted in favor of raising interest rates by 75 basis points for the first time since 1994, underscoring the seriousness of policymakers in tackling the inflationary crisis following a series of alarming economic reports. The measure places the key federal funds reference rate between 1.50% and 1.75%, the highest since the pandemic began two years ago.
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Federal Reserve Board Chairman Jerome Powell is expected to testify before Congress on the economy on Thursday, June 23, 2022. (AP Photo / Jose Luis Magana / Associated Press)
There are growing fears that the Fed will trigger a recession. Rising interest rates tend to create higher rates for consumer and business loans, which slows the economy by forcing entrepreneurs to cut spending. Bank of America, as well as Fannie Mae and Deutsche Bank, are among the Wall Street companies that predict a downturn in the next two years.
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President of the Fed Jerome Powell he acknowledged that the U.S. central bank’s war on inflation could force policymakers to raise interest rates so high that they are dragging the U.S. economy into a recession.
“It’s definitely a possibility,” Powell told lawmakers Wednesday as he testified on Capitol Hill. “We are not trying to provoke and we do not believe we will have to provoke a recession, but we believe it is absolutely essential that we regain price stability, really for the benefit of the labor market, as much as anything else.”