In bear markets, stocks don’t typically fall in a straight line.
Over the past 50 years, even in the worst financial crises of the modern era, brief rallies have occurred 6.5 times on average per bear market.
Unsurprisingly, this year has been no different. But all along the way, Morgan Stanley’s chief investment officer and U.S. equity strategist Mike Wilson has warned investors not to fall into these “bear market traps.”
And even after a more than 20% drop in the S&P 500 this year, Wilson—who received the nod as the world’s top stock strategist in the latest Institutional Investor survey—believes stocks will fall even further. Investors have been too focused on the Federal Reserve’s rate hikes and inflation, he argues, when the real problem is fading economic growth and corporate earnings.
“The earnings recession by itself could be similar to what transpired in 2008/2009,” Wilson wrote in a Monday research note. “Our advice—don’t assume the market is pricing this kind of outcome until it actually happens.”
Wilson believes that the S&P 500 will sink to between 3,000 and 3,300 in the first quarter of 2023 from roughly 3,800 today. And by the end of next year, he expects the index will recover to just 3,900—or even 3,500 in a “bear case.”