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Market Extra: Morgan Stanley’s Mike Wilson says S&P 500 could tumble toward 3,400 if a ‘true growth scare’ is on the cards

Morgan Stanley’s bearish chief U.S. equity strategist Mike Wilson has some bad news and some good news for investors.

On the heels of the worst April for stocks since 1970, Wilson and a team of strategists laid out what’s ahead as we enter “the next phase of the bear market,” predicting the S&P 500 index
SPX,
+0.35%

is in for more selling.

“We think the S&P 500 has minimum downside to 3,800 in the near term and possible as low as 3,460, the 200-week moving average if forward 12 month EPS start to fall on margin and/or recession concerns,” he said, in the note to clients dated Monday.

The latter also “lines up with pre-pandemic highs of 3,400, which seems to be where a lot of stocks have already ventured. In many ways, this makes perfect sense from the point of view that the pandemic did not create real value for the economy or most companies, but rather destroyed it,” said Wilson and the team.

Read: Market ‘not seeing a low yet,’ says Morgan Stanley’s Wilson after ‘ominous’ signal

With inflation high and earnings growth slowing down quickly, stocks are no longer giving investors the inflation hedge they’ve been counting on. “Real earnings yield tends to lead real stock returns on a y/y basis by about 6 months. It suggests we have meaningful downside at the index level as investors figure this out,” he said.

The fact that stocks have been trading “terribly” since last fall was warning investors that bad news was coming down the pipe, he said. First the high multiple stocks got taken out in November and December, as they weighed up the Fed’s policy pivot. “Now they are figuring out that 1Q may be the last good quarter of earnings as higher costs and increased recession risks weigh on future growth,” said Wilson.

Opinion: Recession fears are growing. Is this weak stock market trying to tell us something?

Last week’s sharp move lower was triggered by “growing evidence that growth is slowing faster than most investors believe,” he said.

As for the good news? Wilson and the team had this to say: “On the positive side, the market is currently so oversold,any good news could lead to a vicious bear market rally. We can’t rule anything out in the short term but we want to make it clear this bear market is far from completed, in our view,” they said.

Need to Know: Stocks may keep sliding until institutions join retail investors in capitulation, this firm says

Morgan Stanley had the most conservative forecast among Wall Street banks late last year in its prediction that the S&P 500 would end this year at 4,400, a level the index may now undershoot.

On the upper end of that range, Goldman Sachs has been forced to bring its original 5,100 prediction down to 4,700, while JPMorgan now has a 4,900 target from 5,050.

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