Equities have yet to fully price in the risk of a recession and may
have further fall, according to Morgan Stanley and Goldman Sachs Group
Although this year’s slump in US stocks has left them more fairly
priced, the S&P 500 Index needs to drop another 15 percent to 20
percent to about 3,000 points for the market to fully reflect the
scale of economic contraction, Morgan Stanley strategists led by
Michael Wilson wrote in a note.
“The bear market will not be over until recession arrives or the risk
of one is extinguished,” they said after the benchmark last week
closed more than 20 percent below its January record.
Their views were echoed by counterparts at Goldman Sachs, who said
stocks were only pricing in a mild recession, “leaving them exposed to
a further deterioration in expectations.” Berenberg strategists also
said on Tuesday it was too early to call a bottom for equities with
earnings downgrades just beginning amid expectations of a recession.
Investor sentiment on risk assets has soured in recent weeks as
runaway inflation and a hawkish Federal Reserve have raised the
specter of a prolonged economic contraction. Wilson, one of Wall
Street’s most prominent bears and who correctly predicted the latest
market selloff, said that should a full-blown recession become the
market’s base case, the S&P 500 could bottom near 2,900 index points
— more than 21 percent below its last close.
Separately, Goldman strategists led by Peter Oppenheimer said they
view the current bear market as cyclical, with stronger private sector
balance sheets and negative real interest rates cushioning against
systemic risks associated with structural bear markets.