Morgan Stanley remains pessimistic regarding US stock markets despite recent rally

Broader U.S. equity markets have rallied after hitting 2022 lows. The Dow Jones is now in a bull market, while the S&P and Nasdaq are also off their lows. On the other hand, M. Stanley, which correctly predicted the stock market crash of 2022, is not too optimistic about the evolution of the markets in 2023.

Notably, at the start of 2022, consensus was calling for single-digit returns for the S&P 500 over the course of the year. Over the previous three years, the S&P 500 has delivered double-digit returns and, cumulatively, the index has almost doubled between 2018 and 2021. However, Morgan Stanley has taken an opposite position for 2022 and has been rather bearish in US stock markets.

Morgan Stanley in US Stock Markets

In retrospect, Mike Wilson, Morgan Stanley's chief US equity strategist, was nearly flawless in his market predictions. When US equities rallied mid-year, Wilson maintained his bearish stance and said the rally would run out of steam. In fact, U.S. equity markets ended up hitting new 2022 lows.

However, markets have been strong over the past month and the S&P 500 is now up over 16% from its 2022 low. Wilson thinks US stock markets could also rise in December. He does, however, see the S&P  falling all the way to 3,000 in the first four months of 2023. Wilson added, "That's when we think the de-emphasis on earnings-side revisions will kind of go crescendo. ."

According to him, the bear market is not over yet and "we have significantly lower bottoms if our earnings forecast is correct."

Wilson advises to buy in the next crash

Meanwhile, Wilson said if the US stock market crashes in 2023 as he predicts, it would be a good buying opportunity. He forecasts the S&P 500 to close at 3,850 in 2023. Although his target implies a decline from current levels, it is significantly higher than his early 2023 forecast for the S&P 500, which was between 3,000 and 3,400.

He adds that the pain would be widespread across US stock markets. He said: "Most of the damage will happen in these big companies - not just in the tech sector, by the way. It could be consumers. It could be industrial companies."

Wilson adds, "When those stocks had a tough time in October, the money went into those other sectors. So part of that rally was due to the repositioning of the money that moved."

Jeremy Siegel sees markets heading higher

However, he cautioned against selling everything. Furthermore, given the fragility of previous stock market rallies in 2022, markets are apprehensive of the recent strength in US stock markets.

Meanwhile, not everyone buys Wilson's pessimism. Wharton professor Jeremy Siegel thinks markets won't fall to 2022 lows and predicts a 25% rise over the next two years.

The Fed holds the key to US stock market price action

The evolution of US stock market prices could depend on the actions taken by the Fed. It has hiked rates six times this year and brought the fed funds rate to 3.75%-4%, the highest level in years.

The Fed may not be done with rate hikes and is expected to raise them another 50 basis points in December as well. Speaking at the Brookings Institution last week, Fed Chairman Powell said the Fed was considering slowing the pace of its tightening. He says: "The time to moderate the pace of rate hikes could come as early as the December meeting."

Powell said, "My colleagues and I don't want to tighten too much because ... the rate cut is not something we want to do anytime soon." He pointed out, "That's why we're slowing down and trying to find our way to what the right level is."

US stock markets were rocked by the Fed's actions

US stock markets rallied last week after dovish remarks from the Fed. However, November's better-than-expected jobs report spooked markets.

Given Powell's latest comments, the US central bank now appears to be reconsidering its aggressive rate hikes.