Michael Wilson, chief U.S. equity strategist at Morgan Stanley, is warning that stocks are currently on the expensive side, with the risk-to-reward for equities “very poor” as he expects the S&P 500 index to tumble by 25 percent from current levels.
The S&P 500 has risen by over 5 percent as of Feb. 21 year-to-date but is down by over 6.6 percent in the past one year. Wilson is expecting the S&P 500 to drop to 3,000 in the first half of 2023, which would represent a decline of 25 percent from the current level of just above 4,000.
“The bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn’t coming,” Wilson wrote.
“As [stocks] have reached even higher levels, there is now talk of a ‘no landing’ scenario—whatever that means … Such are the tricks the death zone plays on the mind—one starts to see and believe in things that don’t exist.”
Too Much Optimism
JP Morgan Chase has also issued a warning about significantly optimistic investors setting themselves up for disappointment within the present economic outlook.Regarding the Federal Reserve’s interest rate hikes over the past year, a note by JP Morgan Chase said that the impact of monetary policy can have a lag of a year or two, due to which the investment firm believes it’s too early to call off a recession.
In its February 2023 meeting, the Fed had raised its benchmark interest rate to a range of 4.5 to 4.75 percent, up from around 0.25 percent in March 2022.
Market Volatility, 10-Year Predictions
Financial services firm Fidelity is expecting market volatility to remain high this year, with the United States likely descending into a “mild recession.”“Slower liquidity growth, persistent inflation risk, slowing growth momentum, and greater monetary policy uncertainty raise the odds that market volatility will remain elevated.”