Will S&P 500 Fall to a New Low in 2022? Morgan Stanley Believes So

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The S&P 500 has gone through a boom-and-bust cycle several times this year. US stocks came into 2022 on a strong note after delivering double-digit returns in the preceding three years.

The S&P 500 soared on the first trading day of the year also and Apple’s market cap hit $3 trillion. US stocks have since whipsawed and Saudi Aramco briefly surpassed Apple to become the world’s largest company by market cap.

Meanwhile, Warren Buffett bought Apple stock in both the first and second quarters of 2022. While the “Oracle of Omaha” went slow on buying stocks in the second quarter, Berkshire Hathaway was nonetheless a net buyer of stocks in the quarter.

The S&P 500 has been quite volatile this year. We’ve seen short rallies but the index subsequently fell to new lows. It hit its lowest levels of 2022 in June and went into a bear market. The S&P 500 had its worst first-half performance in decades but rebounded in July. August was also looking like a good month for US stocks before rate hike fears took a toll on sentiments.

The S&P 500 is now down sharply from its August highs. Morgan Stanley believes that US stocks could make a new low in the second half of the year.

Morgan Stanley Predicts New Low for the S&P 500

Analyst Mike Wilson believes that the S&P 500 could fall to 3,400 in the fourth quarter, which is below its June low of 3,666. Notably, Wilson hasn’t accounted for a recession in his forecast and predicts the S&P 500 falling to 3,000 in case the US economy goes into a recession.

To be sure, Wilson had been bearish on US stocks for the last many months and has again reiterated his views. He added, “While the June low for stocks and bonds was dramatic, we’ve consistently been in the camp that it wasn’t THE low for the S&P 500 in this bear market.”

US inflation fell to 8.5% in July from 9.1% in June. However, it is still way above what the US Federal Reserve targets. While inflation in general is negative for stocks, some investing strategies can do well in inflation.

Brokerages Get Bearish on US Stocks

Notably, Morgan Stanley is not the only brokerage that is bearish on US stocks. Bank of America’s technical strategist Stephen Suttmeier said that a head and shoulders pattern is forming in the index, which is a bearish indicator. The brokerage termed the rally in US stocks a typical bear market rally.

Wolfe Research’s Rob Ginsberg also predicted further downside in the S&P 500. Notably, despite the rally in July and early August, the S&P 500 failed to move above its 200-day SMA (simple moving average). The Index has been trading below the 200-day SMA since early April.

The US economy contracted in the first and second quarters of 2022. However, the NBER (National Bureau of Economic Research), which officially declares a recession in the US, looks at several other indicators, including personal expenditure and employment.

While the Biden administration has time and again tried to downplay recession fears, several brokerages, including Citi have raised their odds of a recession amid high inflation and Fed’s rate hikes.

Federal Reserve Would Continue with Its Rate Hikes

The Fed is facing tough choices in managing both growth and inflation expectations. However, time and again, including at last month’s Jackson Hole Symposium, Fed chair Jerome Powell has clarified that controlling inflation is his biggest priority.

At the Symposium, Powell said, that this is “no place to stop or pause.” Powell added, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.” Powell termed these “the unfortunate costs of reducing inflation,” adding “But a failure to restore price stability would mean far greater pain.”

Brokerages Expect S&P 500 To Fall Further in a Recession

Today, UBS also lowered its year-end forecast for the S&P 500 from 4,150 to 4,000. Most brokerages expect the index to fall steeply in case of a recession. Michael Burry, who correctly predicted the US housing crash of 2008, also sold all the holdings of his Scion Asset Management in the second quarter of 2022. He only has a small position in Geo Group stock.

Burry has long been warning of a crash in US stocks. He said that while the multiples for stocks have come down, earnings downgrades would follow next. Incidentally, while lowering its prediction for the S&P 500, UBS also lowered the index’s 2022 EPS estimate to $228 and the 2023 estimate to $235.

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