Don’t buy U.S. stocks just yet

Lisa Shalett, Morgan Stanley’s CIO, wrote in the “2023 Outlook” note sent to Morgan Stanley’s clients that this is a time for patience.

The backbone of this conservative perspective is that the Fed’s actions need 6-12 months to deliver the full economic impact. Shalett says the market might only understand the full influence of aggressive hikes well into next year.

Reflecting her colleague Michael Wilson’s words regarding high earnings risk, the consensus for the S&P 500 EPS for 2023 stands at $230. This is extremely high, given that some significant indicators indicate an 80% chance of a recession.

Shalett wrote that such a scenario fails to account for the possibility that companies will simultaneously encounter falling volumes and failure of pricing power, showing powerful negative operating leverage.

Other remarks

Morgan Stanley’s S&P 500 EPS projection attains $195, particularly below consensus. In line with this assessment, Shalett witnesses a 15-20% retreat from current levels in the S&P 500. The decline in the year’s first half should be observed by recovery through year-end to a level virtually flat with today.

The Fed delay will cut the U.S. dollar and could crack into positive returns in commodities, gold, and non-US stocks.

Morgan Stanley’s CIO counted that emerging markets look quite interesting, given their comparative valuations and general resilience in the face of China lockdowns, energy and food price inflation, and U.S. dollar stability. Founded in part on their expectation for progress in Chinese growth prospects by next spring, the risk/reward is beyond average.