Morgan Stanley's Mike Wilson is telling investors to brace for a winter downdraft.
He warns S&P 500 is vulnerable to a 23% drop — bringing it to 3,000.
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"Even though a majority of institutional clients think we're probably going to be in a recession, they don't seem to be afraid of it," the firm's CIO and chief U.S. equity strategist told CNBC's "Fast Money" on Tuesday. "That's just a big disconnect."
Wilson expects earnings season, which kicks off with financials on Friday, will jolt the market by coming in sharply below expectations. He believes investors will be surprised by how dramatically earnings need to adjust.
"That's another area investors are being a little bit complacent," he said. "Costs are increasing faster than net revenues."
Wilson contends quarterly results will likely kick off a 2023 reset on Wall Street.
"The full-year estimate has got to come down," he added. "Negative operating leverage is really starting to flow through to the income statement from the balance sheet... This is a very underappreciated development during Covid. We over-earned during the pandemic because there was positive operating leverage."
And, investors could get hit with a double whammy due to the timing of the next Federal Reserve interest rate decision on Feb. 1. Wilson anticipates the Fed won't appease investors by signaling plans to pivot.
"Our call is predicated mostly on earnings and the fact that the Fed probably isn't going to be as reactive to a slowdown as they have been historically," Wilson said. "They're not going to be slashing rates into a growth slowdown."
His S&P 500 year-end price target is 3,900, which is second lowest on the Street. With just six trading days in the books, the index is up 2% so far this year and more than 12% since the Oct. 13 low.
"When we actually talk to people, they talk a bearish game about the first half. But they're not really either positioned for it or they don't really think that it's going to be that bad," said Wilson, who has been defensively positioned since last year.