Morgan Stanley says recession would take S&P 500 another 15% to 20% lower

Published Tue, Jun 21 20228:16 AM EDT

The S & P 500 is coming off its worst week since March 2020, and Morgan Stanley's chief U.S. equity strategist warned Tuesday that more downside could be ahead since the market isn't pricing in a recession. Michael Wilson told CNBC's "Squawk Box" that the odds of a recession are 50-50. Should a recession happen, the firm thinks the S & P 500 could fall between 15% and 20% to around the 3,000 level. The benchmark U.S. index ended Friday's session at 3,674.84. "The 3,000 basically incorporates the lower multiples, which was our main call for this year, with earnings going down by about 20%," he said. "We're just not priced for that if that's the outcome," he said. Wilson noted that the chances of a recession have increased materially this year, adding that the market can't look forward until there's clarity around whether the economy will tip into a recession. "As soon as the recession is obvious, that will probably be the time you really want to step in," he said. Still, Wilson said a soft landing remains possible, and the firm's base case for 2022 doesn't call for a recession. But the odds go up "significantly" for 2023, Morgan Stanley said. "The market is going to have a really hard time looking forward until it knows that the risk of recession is extinguished, and we won't know the answer to that for at least three or four months is my guess," he said. The Federal Reserve has hiked rates in an effort to cool inflation numbers that have hit 40-year highs. The move has had an immediate impact on the housing market, which Wilson said is the "single most important driver of the U.S. economy." Additionally, Wilson said that earnings forecasts are too high due to inflationary pressures that will squeeze profit margins. Current estimates are too high even if a recession is avoided. "We're not telling people to abandon stocks completely. We're just saying, look, it's not going to be an easy path from here," he said. Wilson noted the differences between the V-shaped recovery that followed 2020's recession and the current market conditions. "There are times when you want to be aggressively stepping in. This is not one of those times yet ... it's not the end of the world. It's a cyclical bear market - we'll eventually get through it," he said. Wilson turned bearish on the market prior to other Wall Street strategists, repeatedly warning of a "fire and ice" outcome that called for a pullback in stocks.