According to strategists at Morgan Stanley, US stocks face risks from rising energy prices and bond market volatility, potentially leading to a drop of up to 7% in the S&P 500 Index. Michael Wilson, leading the team, noted that while strong corporate earnings have helped maintain stock prices amid higher bond yields, the S&P 500's valuations have recently declined to their lowest levels since March.
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Wilson indicated that a further tightening of financial conditions or significantly higher energy prices could cause the index to fall to around 7,100 points before any potential recovery by year-end. This projection reflects a 7% decrease from the index's close last Friday.
He also anticipates increased market volatility leading up to the midterm elections in November, but maintains a positive outlook on corporate earnings, predicting a year-end rally that could push the S&P 500 to his target of 8,000 points, a nearly 5% increase from current levels. The index has fluctuated since reaching a record high in mid-August, largely due to inflation concerns and the 10-year Treasury yield hovering around 5%. While West Texas Intermediate crude prices have fallen below $100 a barrel, they are still 43% higher than their July lows.
Last week, the Federal Reserve raised interest rates for the first time in three years, but its commitment to combat inflation has kept investor sentiment relatively positive. The S&P 500 is about 2% below its peak and is backed by one of the strongest earnings seasons on record for the second quarter. Other market strategists from firms like JPMorgan Chase & Co. and Goldman Sachs Group Inc. have also expressed optimism about stock performance, although Bank of America Corp. cautions that investor positioning may be over-optimistic as profit growth slows. Wilson has consistently promoted investment in large-cap, high-quality stocks and noted growing momentum in services-oriented and asset-light industries.