The stock market has been in free fall since the Fed said ‘pain was coming.’ Morgan Stanley says buckle up for another drop

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“Fire and ice” isn’t just a show about dragons and zombies on HBO. It’s been Michael J. Wilson’s vision of the stock market throughout 2022.

Wilson, the chief investment officer at Morgan Stanley, has argued that stocks are fighting a toxic combination of economic headwinds—which he calls “fire” and “ice”—that are set to keep equity prices subdued until late 2023.

The stock market’s summer rally was cut short last month as investors digested a reaffirmation of the Federal Reserve’s hawkish inflation-fighting stance around the same time Europe’s energy crisis took a turn for the worse. But even after a roughly 9% drop in the S&P 500 since mid-August, Wilson says buyers should (still) beware.

In a Tuesday research note, the CIO noted that his fire and ice moniker has “proven to be an effective way to describe the first half of this year,” and he expects that will continue to be the case through December.

Wilson believes the stock market is set to experience “fire and ice, Part 2” over the coming months after Fed Chair Jerome Powell’s comments at an annual central bank symposium in Jackson Hole, Wyo., last week.

Powell argued some “pain” may be required to get consumer prices under control over the next year, and economists noted that asset prices (including stock prices) will need to fall to achieve that goal. The S&P 500 sank more than 5% in the days following Powell’s comments, and Wilson says it was just the start.

Fire and ice, Part 2

While some market pundits and investment advisers made the case that the stock rally was a buying opportunity over the summer, Wilson has contended it was nothing but a trap for investors all along.

His argument was, and is, based on the idea that inflation and the Fed’s attempts to combat it with interest rate hikes act as “fire” against stocks, significantly lowering their valuations. Rising interest rates raise the cost of borrowing for corporations as well, making it more difficult for them to invest in their future growth and turn a profit.

And at the same time, slowing economic growth, or “ice,” is pulling down consumer spending, and by extension corporate earning potential.

All of these headwinds are bad news for stocks, and Wilson argues they aren’t going away anytime soon. The CIO pointed to Powell’s comments at Jackson Hole, which “emphatically” dashed investors’ hopes for a “dovish pivot” to interest rate cuts last month amid a weakening global economy.

Wilson also lowered his earnings forecasts for the S&P 500 on Tuesday, arguing that slowing economic growth and “sticky cost pressures, particularly on the labor side” owing to higher wages will compress corporate profit margins moving forward.

He went on to note that the second half of the year should be “more Icy than Fiery as slowing growth becomes the bigger concern for stocks, rather than inflation and the Fed” as well. All of this means the bear market is far from over.

“While acknowledging the poor performance in equities year to date, we do not think the bear market is over if our earnings forecasts are correct,” Wilson wrote.

Wilson’s “minimum downside” for the S&P 500 in 2022 is roughly 13% below current levels at 3,400, while a low of 3,000 (or 23% below current levels) is possible by year-end “if a recession arrives.”

The S&P 500 should then recover to 3,900 by the end of 2023, or 3,350 in a recessionary scenario, according to Morgan Stanley.

This story was originally featured on Fortune.com