Michael Wilson, a strategist at Morgan Stanley, predicted that US stocks would face a sharper decline than many pessimists expect.
Wilson stressed that it is likely that the specter of recession will double the largest annual decline in stocks since the global financial crisis.
According to ArabiaNet, Wilson - who has long been one of the most outspoken pessimists regarding US stocks - said in a research note that while investors are generally pessimistic about economic growth prospects, corporate earnings estimates are still very high, and the risk premium is high. The shares are at their lowest since 2008.
This indicates that the S&P 500 could fall well below the 3,500 to 3,600 points that the market currently estimates in the event of a mild recession, according to Bloomberg.
The consensus could be right in direction, but wrong in magnitude, Wilson wrote, warning that the index could bottom out at around 3,000 points, a decline of 22% from current levels.
The strategist, who ranked first in last year's survey of institutional investors, is not alone in his opinion that the earnings outlook is optimistic, as his counterparts at Goldman Sachs Group expect pressures on profit margins, changes in US corporate tax policies and the possibility of a recession that overshadows the positive impact. China's economic reopening.
One of the factors driving Wilson's bearish view is the effect of peak inflation.
And US stocks rose last week amid signs that a modest easing in price pressures may give the Federal Reserve room to slow down interest rate hikes.
However, Wilson warned that while peak inflation will support bond markets, it is also very negative for corporate profitability, and he still expects disappointing profit margins to continue through the end of 2023.
Strategists at Deutsche Bank Group, led by Pinky Chadha, expect US corporate profits to decline in 2023.
However, they said the stock could rally during the fourth-quarter reporting season, helped by the sell-off at the end of last year and lower share allocation rates by investors.
This view contradicts the results of the latest MLIV Pulse survey, which showed that market participants are preparing for a bleak season to push the S&P 500 lower over the next few weeks.
Earnings announcements are expected to start in earnest on Friday with reports from major banks including JPMorgan and Citigroup.
