The price isn’t right.
That’s the judgment of Morgan Stanley and Goldman Sachs’ technicians, who warned in the new week that the stock market would not be fully priced in the recession. And that’s US equities SPX,
After Monday’s June holiday, trading was off to a solid start.
“Lower multiples and earnings are now more reasonable, in our view, for markets to be more fair. However, in our view, this does not pose a risk of a recession of 15-20% or roughly 3000,” said Mike Wilson, chief US equity strategist at Morgan Stanley. One of the most bearish voices on Wall Street for the year.
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Wilson predicts even higher price-to-earnings ratios for most of Wall Street’s year-end S&P 500 target prices. Their bank is “out of consensus” coming up with a forecast of a 20% -plus decline in 2022 – they are now down 28% from the year before. But Morgan Stanley MS,
Analysts are abandoning their valuation as bond yields soar, with the current 15.3 P / E ratio combining an equity risk premium (ERP) of 330 basis points, which is very low in their opinion.
Wilson wants to see the ERP at 370 basis points, which reduces the P&E ratio of the S&P 500 to 14 times, as long as the bond yields TMUBMUSD10Y,
And earnings estimates are consistent. ERP represents the additional return that investors expect on risk-free bonds on risk-free bonds.
Echoing some of Wilson’s thoughts, Goldman Sachs’ chief global equity strategist, Peter Oppenheimer, sees the market price at risk of mild recession rather than average or deep contraction. According to Goldman Sachs GS, they currently see the bear market as a cyclical and economic cycle,
Research note Tuesday.
“Most bear markets end when the economic conditions are still poor, but there is a sense that they are no longer declining at the same rate,” Oppenheimer told clients in the note. “Even if the yield does not rise much eventually, it seems that markets will at least reduce the risk before we see a real recovery.”
US financial conditions are not really tight based on historical standards, so rates need to rise further or markets need to repeat the risk, which somehow works tighter, he said.
According to RBC Capital Markets, the S&P 500 has a tendency to lose a third of its value.
“The average decline is 32%,” RBC analysts led by US equity strategy head Lori Calvasina said in a note Tuesday. “That kind of decline will take the S&P 500 to 3,262 at this time.”
Note that the average maximum drop for the S&P 500 around the recession is 27%, pulling the S&P 500 to 3,501.
“The 3500 region is a huge support and stress test for the secular bull market, defined by a rising 200-week moving average and a 50% withdrawal of the rally from March 2020 to January 2022, according to the BofA’s Market Analysis Note.
The US stock market traded sharply higher on Tuesday afternoon, with the S&P 500 up 2.8% to close at 3,777, according to FactSet data, at the last check. The index fell nearly 21% this year, based on Tuesday afternoon trading.
“Last week we were talking to investors in two different regions in the US,” RBC analysts said. “Most have shied away from discussing whether the recession is coming and when it will start, how long it will last, how deep it will go, and what the other side will think.”
The meetings were primarily “with long-only institutional investors that we consider long-term and focused on basic stock prices,” according to their note.
Several investors told RBC they were already “trimming around the edges and sticking with the high-quality names they like for the long haul,” according to analysts. “Many people told us that they were already sitting on a higher cash balance than usual.”