The S&P 500 index is ripe for a major crash, according to analysts at Morgan Stanley (NYSE MS). The closely-watched index has already plunged to its lowest point since January 26. It sits about 4.70% below the highest level this year.
Morgan Stanley’s stern warning
Some analysts and investors are assessing their outlook for the S&P 500 and the broader market in general. The main thesis is that stocks jumped too quick as bets that the Federal Reserve will pivot soon because of the falling inflation. As a result, the S&P 500 moved to a bull market, jumping by 20% from its lowest point in 2022. The US dollar also plunged from $115 to about $100.
The other thesis is that corporate earnings have not been as strong as expected. According to FactSet, the S&P 500 earnings and revenue growth was the lowest it has been since the pandemic. And most companies have expressed fears about the economy. In a statement, Morgan Stanley warned that the S&P 500 index and the SPY ETF could plunge by about 26%.
The report was notable because it came from Mike Wilson, who is a highly-respected analyst. In 2022, Institutional Investor ranked him as the number 1 analyst in Wall Street. He said:
“The risk-reward for equities is now “very poor,” especially as the Fed is far from ending its monetary tightening, rates remain higher across the curve and earnings expectations are still 10% to 20% too high.”
Jeremy Grantham is also extremely bearish
Mike Wilson is not the only bear in Wall Street. Jeremy Grantham, one of the most respected investors of all time recently warned that the S&P 500 index could plunge to about $3,200. Grantham, who founded the $75 billion GMO Capital, was among the first investors to warn about the super-bubble in the stock market.
Meanwhile, analysts at Bank of America warned that the S&P 500 index could plunge to $3,800. Their analysis was a bit accurate considering that the index has plunged to about $4,000. JP Morgan analysts also warned that:
“Historically, equities do not typically bottom before the Fed is advanced with cutting, and we never saw a low before the Fed has even stopped hiking.”
With the yield curve being the most inverted it has been in decades, there are rising odds of a recession. In a statement, Jim Cramer said that the stock market rally will only happen if the Fed changes its tune about interest rates.