Morgan Stanley expects the S&P 500 index to be at 3900 levels at the end of 2023, almost at the same levels as in November 2022. However, that does not mean, 2023 will not remain volatile and trade flat. “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 comes out of “2023 US Equities Outlook: The Road Not Taken”, a research note from Morgan Stanley.
Earnings, according to the report, will play a big role in keeping the index busy all through 2023. “We remain highly convicted that 2023 bottom-up consensus earnings are materially too high. On that score, we revise our 2023 EPS forecast another 8% lower to $195 in the base case. This leaves us 16% below consensus on ‘2023 EPS in our base case and down 11% from a year-over-year growth standpoint,” says the report.
If earnings estimates are downgraded, so will the valuations of stocks. However, on the back of Powell’s dovish speech and the Fed’s willingness to slow down the pace of rate hikes, stocks currently are rallying. The situation may change early next quarter. Morgan Stanley sees the S&P 500 discounting the 2023 earnings risk sometime in Q1 2023 with S&P 500 around a 3,000 — 3,300 price trough. Morgan Stanley thinks this occurs in advance of the eventual trough in EPS, which is typical for earnings recessions.
That leaves the earnings outlook after Q1 2023 an important milestone for stock market investors. While 2023 could be a very challenging year for earnings growth, according to Morgan Stanley, 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 their base case scenario.