Morgan Stanley suggests against buying latest rally in US stocks.

michael wilson — who has long been one of the most vocal bears on US stocks — said in a research note that while investors are pessimistic about the outlook for economic growth, corporate earnings estimates are still too high and the Equity risk premium is at its lowest since before 2008. That suggests the S&P 500 could fall well beyond the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, he said.

“The consensus could be right in terms of direction, but wrong in terms of magnitude.“, said Wilsonwarning that the benchmark index could bottom around 3,000 points, about 22% below current levels.

The strategist, who ranked first in last year’s survey of institutional investors, is not alone in his opinion that earnings expectations are too optimistic.

Their counterparts at Goldman Sachs Group Inc. expect pressure on profit margins, changes in US corporate tax policies and the likelihood of a recession to dwarf the positive impact of China’s economic reopening.

One of the factors driving Wilson’s bearish view is the impact of peak inflation. US stocks rose last week amid signs that a slight easing of price pressures could give the Federal Reserve room to potentially rein in its interest rate hikes.

However, Wilson cautioned that while a spike in inflation would support bond markets, “it’s also very negative for returns.” He still expects margins to continue to disappoint through 2023.

Deutsche Bank Group AG strategists led by Binky Chadha they also expect profits at U.S. companies to decline in 2023. Still, they said stocks could rebound during the fourth-quarter reporting season, supported by a year-end sell-off and poor investor sentiment. .

That view is at odds with findings from the latest MLIV Pulse survey, which showed market participants are bracing for a dismal corporate earnings season to push the S&P 500 down in the coming weeks. Earnings season kicks off in earnest on Friday, when big banks including JPMorgan Chase & Co. and Citigroup Inc.