A major earnings slump will push stocks into an even deeper slump in the final months of 2022, a Morgan Stanley strategist warned clients on Tuesday.

Morgan Stanley’s Michael J. Wilson, known for his bearish projections during the current downturn, said he expects “lows for this bear market will likely arrive in the fourth quarter.”

Wilson’s projections suggest the S&P 500, the broadest measure of US stocks, will plummet to at least 3,400 during the final three months of the year – a roughly 13% decline from its current level.

He warned that the broad-based index could fall even further to 3,000 if the US economy falls into a deeper recession.

Stocks have been under pressure for months as investors signal pessimism about the Federal Reserve’s ability to achieve a “soft landing” for the economy while hiking interest rates. US gross domestic product has declined for two consecutive quarters – a development that many economists consider proof that a recession is already underway.

Worried NYSE trader
Morgan Stanley expects the S&P 500 to fall at least 13%.
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In his note to clients, Wilson argued that slowing economic growth has impacted company performance and weighed on stocks more than the Fed’s policy tightening.

“We think the next several quarters will end up containing some of the most significant downward revisions to forward EPS forecasts we have seen in the past several cycles,” Wilson said in the note.

Bloomberg was first to report on the note.

Wilson projected that corporate earnings would decline by 3% in 2023 even if the US avoids a recession.

Bearish views on the state of the US economy have lingered despite continued strength in the labor market, which grew at a robust clip in August. “Big Short” investor Michael Burry is among those who have predicted a major downturn for stocks in the months ahead.

Other analysts are more optimistic about the market. Goldman Sachs noted Monday that there were “encouraging signs” about the Fed’s ability to engineer a soft landing.

Goldman economists pointed to easing inflation as well as positive trends in the labor market, according to Business Insider.

“Sharply lower commodity prices, a stronger dollar, and large improvements in supply-chain disruptions all suggest that goods price inflation will continue to abate,” the Goldman economists said.

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