Stocks Could Fall 20% or More: Morgan Stanley

The chances of the S&P 500 falling 20% ​​or more are increasingly likely, according to Morgan Stanley.

Company strategists say there is growing evidence that the U.S. economy is slowing and consumer confidence is declining. They defined two short-term paths for stocks – the “fire” and “ice” scenarios.

The “fire” scenario, which would result in a 10% correction, would occur if the Federal Reserve began to remove monetary accommodation in response to an overheating economy, strategists said.

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The “ice” scenario would be caused by earnings revisions and deceleration in macroeconomic data points due to falling demand, supply chain issues and pressure on margins, and generate a 20% drop. or more of the S&P 500.

“The ‘ice’ scenario is starting to look more likely,” Morgan Stanley strategists led by Michael Wilson wrote.

Morgan Stanley’s warning comes as global markets were hammered on Monday as problems in China’s real estate sector could cause contagion around the world.

If the “ice” scenario were to occur, it would be the first bearish market for the S&P 500 since the index plunged 34% from February 19, 2020 to March 23, 2020, as COVID-19 caused the most economic downturn. marked from the post-WWII era.

The index had climbed 102% from its pandemic low until September 2 as investors celebrated the reopening of the global economy.

The unprecedented gains recently caught the attention of Wall Street, where strategists from Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and elsewhere have warned of the potential for a market sell-off.

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Morgan Stanley strategists believe investors should take a defensive stance in high-quality healthcare and consumer staples companies while retaining some exposure to financials to hedge against a possible rise in interest rates.