New rally could cause the S&P 500 to fall 26% in 2023

• Morgan Stanley’s Mike Wilson stated that stocks are rallying in the hope that the Fed will stop raising rates, which will fool investors into believing the bear market is over.
• But stocks could be hit with an earnings recession next year, he told Bloomberg, warning a 26% drop in the S&P 500 was still possible.
• He said that other market commentators were not bearish enough about margin deterioration.

The current rally in stocks will trick investors into thinking the bear market is over, but there’s still a case for the S&P 500 to fall another 26% next year, according to Morgan Stanley’s chief US equities strategist Mike Wilson.

Institutional Investor’s top portfolio strategist spoke out a day after Jerome Powell, Federal Reserve Chairman, indicated that rate hikes would slow down as soon as this month.

“Powell’s commentary matches what we’ve been saying. They’re going to pause in January, and the market is ahead of that. Wilson spoke in an interview with The Wall Street Journal about the classic Fed pause stock market rally. Bloomberg TVThursday 

The Fed chief’s remarks were a wake-up call stocks to soarWednesday saw tech and other growth stock suffer from Fed rate hikes throughout the year.

Wilson said that although the Nasdaq and other stocks with high shortings could be leading the new market rally but that investors remain in a bearish market, even if gains continue through December.

He added, “This rally is going to go further and will likely drag people back into believing that this bearish market is over.”

Stocks gained momentum following the October inflation report clocked in below-expectationsThe Fed is expected to ease its monetary tightening and allow equities to breathe, this is encouraging.

Wilson argues that corporate earnings are still 20% too highStocks will drop next year, which will cause them to plummet in 2023’s first half.

Also, inflation is expected to slow to 2%-3.3% next year. This is good news for the economy but bad news for stocks. That’s because falling inflation will weaken profit margins, Wilson said, adding that a moderate recession that tanks the S&P 500 to 3,000 in the first half of next year was “not really a stretch.”

The bear-case scenario is a 26% decline from current levels. This is in line with other strategists, who have warned of a huge falloff in equities next fiscal year as the US flirts to a recession.

Bank of America warned that a US recession might ravage the stock markets and send huge amounts of money. stocks plunging 24% next yearJPMorgan and a number of other banks warned that the S&P 500 could soon retest a low of 3,577This is a 12% decrease from the current levels.