US Stocks: S&P 500 Could Plunge to 3,000 If Recession Hits Economy, Morgan Stanley Warns

Morgan Stanley has warned that the stock market sell-off, triggered by recession fears and the inflation specter, has not ended yet. The brokerage says that the US stock index S&P 500 could drop up to 25 percent in the next four months. The S&P 500 is already down 17 percent this year to around 3,980 currently.

"Our '22/'23/'24 base case estimates are now 3%/13%/14% below consensus, respectively ...In our base case, 2023 now marks a modest earnings contraction (-3% year-over-year growth), though we do not embed an economic recession in this scenario," analysts at Morgan Stanley wrote in a note for investors.

New York Stock Exchange
New York Stock Exchange Wikimedia Commons

The analysts say that the Wall Street bear cycle has not ended yet and that they expect the S&P 500 to fall to 3,400 by the end of the year. Even this level is not a guaranteed bottom for the market. If the US economy slips into a recession, the index could plunge to 3,000, the analysts warn.

"While acknowledging the poor performance in equities year-to-date, we do not think the bear market is over if our earnings forecasts are correct," they wrote, Yahoo Finance reported.

In July, analysts at Bank of America warned that a 'recession shock' has begun for markets after data showed Wall Street stocks suffered the worst half-year losses in more than 50 years. According to BofA Chief Investment Strategist Michael Hartnett, the bank's 'bull and bear indicator' remains at maximum bearish for a straight third week, Bloomberg reported.

US economy expands 1.4% in fourth quarter; corporate profits fall
A customer counts his U.S. dollar money in a bank in Cairo, Egypt March 10, 2016

In the first six months of the year, the S&P 500 stock market index lost 20.6 percent, which was the steepest half-yearly loss for the US stocks since 1970. The index also breached the bear market territory, having lost more than 21 percent from the January high.

Analysts worry that hiking the interest rates will result in a money squeeze that will eventually push the US into recession, thereby affecting corporate profits. A conservative estimate is that the S&P 500 can potentially drop another 20 percent if the country slips into recession.

According to some economists, the world's biggest economy could fall into a recession as early as this year. "If the US Federal Reserve continues hiking rates the stock market will react quite negatively," Dan Wang, chief economist at Hang Seng Bank China, said, according to the BBC.