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Morgan Stanley’s equity strategists remain bullish on U.S. stocks into the year-end. They believe the ongoing bear market rally has more legs before “the deteriorating fundamentals take us to lower bear market lows next year.”
The strategists prefer to focus on the technicals at the moment and continue to see the market breadth as a key reason why they remain bullish in the near term. Last week, they raised many eyebrows when they said the S&P 500 could reach a price trough of 3,000-3,300 in Q1 2023.
“We’ve gotten a fair amount of pushback on that our forecast on this front is too aggressive both from a magnitude and timing standpoint. While directionally bearish, many investors struggle to see even a retest of 3,500. In our view, what was priced at the October lows was peak Fed hawkishness, not material earnings downside,” the strategists explained in a client note.
Morgan Stanley projects the EPS estimates to fall by 15-20%, which should “demand a more recessionary type 13.5-15x multiple on materially lower EPS.”
If the Fed decides to pause hiking, they say the equity market “may get the benefit of the late cycle “pause trade” typically worth ~+15%.” However, in that case, stocks won’t get a boost from the “cuts before a recession” trade, which the strategists estimate is worth another ~+10%.
