Wall Street heavyweights including Morgan Stanley and Bank of America anticipate a more than 20% decline in stock prices in 2019. They have been saying the following.
+ As the Fed raises rates, US stocks face a recession, lowered earnings expectations, and liquidity issues.
+ What could cause stock prices to decline, according to Morgan Stanley, Bank of America, and Deutsche Bank, is listed below.
Three of the major Wall Street banks are singing from the same pessimistic hymn book, predicting that US stocks may decline by more than 20% in 2019.
A liquidity crisis brought on by the Federal Reserve might be problematic for Bank of America and the S&P 500 stock index. Lower earnings expectations and a US recession, according to Morgan Stanley and Deutsche Bank, could cause the selloff.
The benchmark index has recovered from its October lows to hover around 4,000, but analysts think the upswing is merely a break in the year-long bear market it entered.
The S&P 500 will drop 15% in 2022 as a result of the Federal Reserve's aggressive interest rate increases to combat inflation, which is at 40-year highs, concerns that tightening could send the US into recession, and the fallout from Russia's invasion of Ukraine.
Now is the time for equities to recoup their losses after years of low interest rates and free money from government and corporate stimulus. The big banks predict the following for the S&P 500, along with their reasoning.
Morgan Stanley
According to Morgan Stanley, the S&P 500 will decline by 24%, most likely in the first quarter of 2023, to a range between 3,000 and 3,300. According to Mike Wilson, the company's senior US equities strategist, a buildup of companies are decreasing their earnings forecasts as a result of the recession, which lowers stock prices.
According to Wilson, "that's when we anticipate the deceleration on the earnings side revisions will kind of reach its crescendo."
When there is a downturn in the economy, firms and consumers typically cut back on spending, which lowers company revenue. Higher interest rates increase the cost of borrowing, which drives up the cost of investment for businesses.
He declared, "The bear market is not over." If our profits projection is accurate, we will have far lower lows.
Wilson forecasted severe market volatility but believes the S&P 500 will end 2023 near 3,900.
"Therefore, even if 3,900 seems like a fairly dull six months, this is going to be difficult. It will be an exciting ride, "Wilson remarked. He said that larger-cap firms, and not just tech stocks, will suffer greatly from weaker earnings.
According to Bank of America, a recession will ravage markets in 2019 and the first quarter will see a 0.4% decline in economic growth.
The S&P 500 might drop 24% from its present levels to as low as 3,000, according to this forecast, as businesses are forced to lower their earnings projections. A new low in the current bear market cycle would be reached with that.
The Fed's quantitative tightening (QT), which involves removing about $95 billion in Treasury bonds and mortgage-backed securities from its $9 trillion balance sheet each month, poses an additional risk that could seriously impair market liquidity.
Bank of America said the coming recession will be different, in part because of the "biggest bubble" is in "monumental, unprecedented leverage risk at governments and central banks", rather than with consumers and businesses. That could lead to liquidity risks in odd places, such as the S&P 500, given the Treasury market feeds into equity pricing.
The bank also expects the benchmark index to end 2023 at 4,000, but to suffer price swings along the way.
In its 2023 outlook, Deutsche Bank stated that it anticipates a steep decline in global equities as the US economy experiences a severe and lengthy slump. However, it predicts that the US equity market would fall off around the middle of the year rather than in the early months.
It predicted that the S&P 500 would rise to 4,500 in the first half before falling by nearly 25% in the third quarter as the economy entered a complete recession as a result of central bank tightening. The index would then rise to 3,375.
According to Deutsche Bank's chief economist David Folkerts-Landau, "we view the Fed and ECB as being totally committed to bringing inflation back to desired levels within the next several years."
He said, "It will not be able to do so without at least moderate economic downturns in the US and Europe, and significant rises in unemployment, even though the costs in doing so may be lower than in the past for reasons we give out.
According to Deutsche Bank, corporate earnings will generally decline from $222 this year to $195 the following year.
In the event that the recession doesn't endure for more than a few quarters, its staff also anticipates a stock market recovery by the end of 2023. By year's end, the bank forecasts that the S&P 500 will recover to 4,500.
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