S&P 500, after falling by almost 17% in 2022, is currently at levels of around 3900. Morgan Stanley in a research note titled, 2023 ‘US Equities Outlook: The Road Not Taken’ sees the index at the same level in 2023. While our year-end 2023 base case price target of 3,900 is roughly in line with where we’re currently trading, it won’t be a smooth ride – is what the report notes.
Morgan Stanley remains highly convicted that 2023 bottom-up consensus earnings are materially too high. On that score, Morgan Stanley has revised their 2023 EPS forecast another 8% lower to $195 in the base case.
More specifically, Morgan Stanley’s base case for the S&P EPS forecast for 2023 is now $195, down from $212, while their bear and bull case forecasts are $180 and $215, respectively.
After what’s left of this current tactical rally, Morgan Stanley sees the S&P 500 discounting the 2023 earnings risk sometime in Q1 2023 with a 3,000-3,300 price trough.
The earnings are expected to fall to the nadir during the recessionary period sometime in 2023. But then, a rebound in earnings is expected in 2024 which will reflect much earlier in the stock prices.
“While we see 2023 as a very challenging year for earnings growth, 2024 should be a strong rebound where positive operating leverage returns—i.e., the next boom. Equities should begin to process that growth reacceleration well in advance, and rebound sharply to finish the year at 3,900 in our base case,” says the Morgan Stanley report.
Since the start of the year, rate hikes were expected while pulling the valuations down. And, stock prices did come down heavily over the last 10-11 months. For Morgan Stanley, 2023 will be as ‘boring’ year as it was in 2022— If one were to take our S&P bear/base/bull targets (3500/3900/4200) at face value, they might say it looks like we are expecting a generally boring year. However, nothing could be further from the truth. In fact, we would argue the past 12 months have been pretty boring because a bear market was so likely we simply set our defensive strategy and stayed with it –i.e., boring can be beautiful.