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Investors should remain “defensively positioned” despite the ongoing tactical rally in equities, Morgan Stanley’s U.S. Equity Strategists said in a client note.
The strategists are “highly” convinced that 2023 bottom-up consensus earnings are materially too high, hence the next leg lower should be driven by revised 2023 EPS forecasts. As a matter of fact, Morgan Stanley cut its 2023 EPS forecasts by another $8 to $195 in the base case.
“This leaves us 16% below consensus on ’23 EPS in our base case and down 11% from a year-over-year growth standpoint. After what’s left of this current tactical rally, we see the S&P 500 discounting the ’23 earnings risk sometime in Q123 via a ~3,000-3,300 price trough. We think this occurs in advance of the eventual trough in EPS, which is typical for earnings recessions,” the strategists said in a client note.
As a result, investors should stay defensive and seek to gain exposure to Healthcare, Utilities, Staples, as well as defensively oriented energy stocks. On the other hand, Morgan Stanley remains underweight Consumer Discretionary and Tech Hardware.
On a more positive note, Wilson says 2024 should yield “a strong rebound.”
After the new lows are hit in the first quarter of the next year, Morgan Stanley’s 2023 year-end price target for S&P 500 is 3900. The rally should be driven by the market beginning to process growth reacceleration “well in advance.”
