S&P 500 bottomed out in Q1, creating ‘great buying opportunity,’ says Morgan Stanley’s Wilson

The S&P 500 will set a new low from 3,000 to 3,300 in the first quarter of next year before jumping back to 3,900 by the end of 2023, according to Michael Wilson of Morgan Stanley, chief equity strategist.

One of the noisiest bears on Wall Street, Wilson correctly predicted this year’s stock market sell-off. But he sees a “great buying opportunity” ahead, with his call that shares will hit a new low in the first quarter.

“It’s going to make a new low sometime in the first quarter, and that would be a great buying opportunity,” he said in an interview with CNBC on Sunday. “Because by the time we get to the end of next year, we’ll be looking at 2024, when earnings will accelerate again.”

“I think we are in the final stages. But the final stages can be very challenging, right?”

Last week, a team of strategists at Morgan Stanley led by Wilson predicted that the S&P 500 would end next year roughly on par with where it is now, at 3900. The S&P 500 SPX,
It closed down 0.4% at 3,949 on Monday.

While the end-of-year target of 2023 may seem unexciting compared to the current level, Wilson believes the trajectory “is going to be very choppy.”

Read: Markets will move into ‘hope’ phase next year, investors would be wise not to miss it, says Goldman Sachs

After getting some “bounce back,” Wilson and his team explained their call in more detail Monday, in a note that includes three additional points to consider through the end of 2023:

  • First, the S&P 500 won’t break until the job market does. Instead, it will give the possibility of a “benefit of the doubt” soft landing outcome. The stock index is currently trading above its 200-week moving average of 3,639 (see chart). He also thinks the rally could have more legs to 4150 or more through the end of 2022.

Source: Bloomberg, Morgan Stanley Research

  • To support their call for the S&P to decline in the first quarter of 2023, Wilson and his team believe that the S&P 500 could decline at 3000 to 3300. In our view, what was priced in was “peak hawkishness” by the Fed, not “low physical earnings,” As the team said. The team expects a material contraction of 15-20% in forward earnings per share, not a “modest” contraction in 2015/16 earnings.

  • However, Wilson’s team also sees a rebound from the first-quarter low as the market begins to discount growth recovery long before late hard data turns more constructive. “In our view, we are at a point in the cycle where it makes more sense to assume a linear price path as this is likely to be a trading environment for some time.”

We see: Markets are getting a wake-up call in 2023, Morgan Stanley says, which offers a plan for investors to prepare.

Wall Street’s major indices started the week lower as a fresh round of COVID-19 lockdowns in major cities in China took its toll on Wall Street. The S&P 500 fell 0.4% and the Nasdaq Composite Index,
decreased 1.1%.

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