Wall Street analysts warn of imminent earnings recession

Wall Street analysts warn of imminent earnings recession

The U.S. could suffer even steeper losses in the coming weeks due to an imminent earnings recession, according to Morgan Stanley strategists.

Michael Wilson, the chief U.S. equity strategist at Morgan Stanley and a long-time Wall Street bear, warned this week that incoming fourth-quarter corporate earnings reports are likely to disappoint investors this week, sending stocks to a two-year low.

Wilson wrote that we're not biting on this recent rally.

He suggested that the S&P 500 could fall to 3,000 points by the end of the year, down 25% from current levels. The benchmark index plunged 19% in 2022.

The S&P has rallied so far this year, with the S&P up about 4% on Wednesday after the better-than-expected December inflation report showing consumer prices fell for the first time since early 2020. The December jobs data shows that the economy is slowing, fuelling hopes that the Federal ReserveFederal Reserve will stop its aggressive interest-rate hike campaign earlier than previously anticipated.

Wilson says that the relief rally is unlikely to last long as the weighs on corporate earnings.

Wilson is not alone in warning that the rally could soon fade, Goldman Sachs analysts said last week that the S&P could plunge 22% this year if the economy falls into a recession. The Goldman strategists believe that even if there is no downturn, the stocks are tumbling another 10%.

Wilson's note has a glimmer of hope for investors, as he sees the bear market end later this quarter or early in the second.

The benchmark interest rate was raised seven times last year by the Fed, to a range of 4.25% to 4.5%, well into restrictive territory.

Officials stated that they will hold rates at elevated levels for some time in the future for 2023 and that they intend to hold rates at elevated levels for some time. The participants observed that a restrictive policy stance would need to be maintained until the data provided confidence that inflation was on a sustained downward path to 2 percent, which is likely to take some time, the said. The historical experience cautioned against a prematurely loosening of monetary policy because of the persistent and unacceptably high level of inflation.