A few days ago, the US Federal Reserve criticized the early celebration of the markets and confirmed that efforts to fight and curb inflation rates are still continuing until the Fed targets are achieved.
And coinciding with the Federal Reserve’s statement, which came following the first slowdown in interest rates following 4 strong increases of 75 basis points, voices warning of a recession were louder, and there are even those who believe that the recession has already occurred..
US Treasury Secretary Janet Yellen earlier predicted a decrease in inflation in the United States in 2023, and indicated that economic growth has slowed significantly, and that she still hopes that the labor market will continue to be strong.
Yellen said I think by the end of next year, we will see much lower inflation if there is no unexpected shock, adding that there is a risk of a recession, but it is certainly not necessary to bring down inflation.
The worst crisis
Michael Wilson, a strategist at Morgan Stanley (NYSE:MS), says the decline in US corporate profits might rival the era of the financial crisis since 2008.
Michael Wilson, a strategist at Morgan Stanley, believes that US stocks are heading towards their worst year since the global financial crisis, and that corporate profits are regarding to meet the same fate.
A recession is on the horizon
The looming earnings recession “may itself be similar to what happened in 2008/09,” said the strategist at Morgan Stanley.
Michael Wilson added that this might lead to a new stock market decline that is “much worse than most investors expect,” he wrote in a note.
“Our advice – don’t assume the market is pricing in this kind of outcome until it actually happens,” said Wilson, a strategist at Morgan Stanley.
Alarming signs
The strategist — a powerful equity forecaster who has called this year’s recession — said that although inflation had begun to ease from historic highs, recent signs of weakness in the US economy were troubling.
Team leaning Morgan Stanley Now toward a bear state forecast for earnings of $180 per share in 2023 compared to analyst expectations of $231.
This – combined with the fact that the current equity risk premium is lower than it was in August 2008.
That comes even though valuations are higher — which might send the S&P 500 down 3,000 points next year, they said, which would mean a 22% drop from last Friday’s close.
Half will not fall
Wilson certainly doesn’t expect systemic financial risks or signs of malaise in the housing market, and so he doesn’t expect a 50% drop for equities, as they did in 2008.
A two-month rally in US stocks – which kept the S&P 500 on track for its biggest annual drop since 2008 – has faded following aggressively hawkish signals from the Federal Reserve and European Central Bank.
Last week, US stocks failed to overcome the technical bearish trend prevailing since the beginning of the year, which put an end to the last three bear market rally.
Strategists at Goldman Sachs Group Inc also warned of profit margin risks in the coming year as inflation remains high.
Among the sectors, Wilson said he’s overweight in health care, basic materials and utilities, and underweight in discretionary and technology devices stocks.
The tightening is not over yet
San Francisco Fed President said over the weekend that monetary policy makers are committed to reducing inflation levels, stressing that the bank is still far from achieving that goal.
“We still have a long way to go, we are far from the goal of price stability,” Mary Daly added at a virtual event hosted by the American Enterprise Institute.
Daly believes that the labor market suffers from imbalance, as anyone who wants to get a job will be able to do so easily, but companies suffer from difficulty in finding employees.
The Federal Reserve raised interest rates by 50 basis points this week to reach 4.25% and 4.5%, following 4 consecutive increases of 75 basis points, and the bank expected interest rates to peak at 5.1% next year, compared to a previous forecast of 4.6%.
