The pain isn’t over for stocks – weak earnings will drag the S&P 500 down another 8%, Morgan Stanley CIO warns

• Stocks have struggled over the second half of 2023 – and the pain isn’t over yet, according to Morgan Stanley’s Mike Wilson.
• Weak earnings will drag the S&P 500 down another 8% by the end of the year, he said Monday.
• Big Tech giants Microsoft, Alphabet, Meta and Amazon are all set to report their quarterly results this week.

US stocks won’t rally anytime soon, Morgan Stanley’s top strategist has warned.

Mike Wilson said Monday that he expects the S&P 500 to drop this week, with weaker-than-expected earnings likely to snuff out any potential rebound for the benchmark index.

“We would not be surprised to see a further move lower in price this week below the October lows before the next attempted rally,” the US bank’s CIO and chief US equity strategist wrote in a research note seen by Insider.

“Based on our view of earnings, valuations and policy, we believe the S&P 500 will have a hard time getting back above what were previously levels of support,” Wilson added, referring to the level the gauge was trading at before its recent five-day losing streak.

Instead, Wilson stood by his long-standing forecast that the S&P 500 will fall to 3,900 points by the end of 2023, which is 8% where it traded at as of Monday’s closing bell.

Slowing earnings could add to Wall Street’s headache at a time when stock investors are already fretting about an unprecedented spike in longer-duration Treasury bond yields.

Tesla sparked some concern last week when it missed analysts’ third-quarter targets – and followed up that flop with a “mini-disaster” of an earnings call where CEO Elon Musk flagged economic headwinds and bemoaned slow production on the Cybertruck.

Fellow mega-cap “Magnificent Seven” stocks Microsoft, Alphabet, Meta Platforms, and Amazon are all set to publish quarterly earnings of their own this week.

As well as warning about a profitability slowdown, Wilson said he’s expecting stocks to suffer further because the Federal Reserve now looks unlikely to slash interest rates anytime soon. The central bank has repeatedly signaled in recent months that it intends to keep borrowing costs high well into 2024 in a bid to kill off inflation, which is still lingering clear of its 2% target.

“While the Fed may be close to pausing its tightening campaign, it is likely far from ready to begin loosening its stance,” Wilson wrote. “Furthermore, the tightening the Fed has done over the past 18 months is now starting to be felt in the broader economy.”

When interest rates are high, stocks tend to suffer because investors can get better relative returns by putting their money in a savings account and higher borrowing costs chip away at listed companies’ future cash flows.

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