Morgan Stanley's HUGE Warning | Big S&P 500 CRASH in 2023.

23 percent to go that is what a new

report from Morgan Stanley sees we're

going to go through this report right

now so they suggest that weaker earnings

and a Fed commitment to fighting

inflation make 3 900 for the S P 500 an

easy sell and in this story they're

going to go into exactly why they have

this thesis so let's get right into the

meat of the matter first they actually

think that most of the consensus could

end up being right that the first half

of the year ends up quite challenging

for markets but the second half of the

year will be better and hopefully and in

some cases much better the some cases

being which stocks you end up picking

personally I believe you're going to see

a really big rotation away from the

stocks that did really well last year

which really only got big inflows

because of trends like McDonald's why is

it only down 1 percent when its revenues

down eight percent ah right because

that's what people do they shift into

Staples when we're walking into a

recession recession comes people

potentially then rotate back to the

growth stories they think are going to

pull us out of the recession and at

least that's how I'm positioning by

looking for pricing power stocks I think

it's too late personally to be heavily

short this Market I think that creates a

lot of risk but that's my personal

opinion Morgan Stanley believes that

they we will all face a mild recession

that starts in the first half and after

the recession starts Morgan Stanley

actually believes that the FED will end

up cutting rates in response now this is

something that we've already seen

starting to get priced into markets that

we're expecting potentially

175 basis points of cuts by the end of

2023 based on what the bond Mark is

projecting and a total of 500 basis

points of cuts before this entire Titan

air or this entire sort of fed cycle

we've gone through is over that could be

a total of potentially three years right

to go but anyway they do give this

caution though they say that the data

we're seeing rarely does not lead to a

recession in other words the data is

coming in so bad right now these are

like ISM surveys for prices paid for new

orders manufacturing right these sets of

data are coming in so bad we have not

seen uh or I should say we rarely see

the not recession scenario play out

however that recession could end up

being a software session sort of a mild

recession and of course that's the

debate now we're going to see a hard

Landing or a soft landing and Morgan

Stanley believes this is actually where

short-term market price risk really

exists because basically they're saying

look part of the market is pricing in a

hard Landing part of the market is

pricing in a soft Landing that creates

optimism and they believe even though

we're going to end up seeing a recession

in fed Cuts between now and then you

could still see another 23 downside as

the overall margins at companies that

don't have pricing power I hate to say

it but like a lot of the Legacy

companies in the S P 500 actually drag

the index down and this is why it's so

important to pay attention to companies

in my opinion with pricing power as we

actually go into recession now they

suggest the reason they feel this is

because they've seen exactly this in

August of 2001 and in 2008 immediately

before the actual recession hit in

Earnest and dropped out uh and the

bottom dropped out on valuations

basically we had the valuation

compression leading into the recession

which would be the beginning of 2000 to

August of 2001 and 2000 really like 7 to

2008 then you saw the bottom drop out

and that's because first you see sort of

that compression of fear of multiples or

of those trades where everybody sort of

runs to like the Staples and the

defensive stocks right and then you

actually see EPS drop across the board

and if you look at the S P 500 before we

talk about the S P 500 quick reminder

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and if you look at the S P 500 right now

the S P 500 is trading for 17 times

EPS now the problem with that is we we

are seeing a yield right now on the

10-year treasury of 3.55

that gives us an equity risk premium of

just 233 basically what they're saying

is the cash return that you could expect

on the S P 500 is only 2.3 percent

higher than the 10-year treasury right

now and Morgan Stanley is arguing why

when you're walking into a recession

where recessions usually bring

unforeseen shocks and events why would

you invest in stocks for 233 basis

points if you're if you could be getting

a risk-free 3.55 on treasuries so long

and short of it they're like

um a lot of companies are going to face

some serious earnings downside and it's

going to be a problem they also don't

see the 10-year treasure yields Falling

by more than 75 to 100 basis points now

this I think is fascinating because that

means if treasury yields stay somewhere

around uh let's see right now they're

about 2.7 let's say treasury yield end

up falling to somewhere around 2.75 to

3. you actually are still in a dangerous

environment for real estate and real

estate ownership and they think it's

unlikely that treasury yields are going

to fall by more than that until this

entire situation is done and the FEDS

really cut rates a lot because once the

FED Cuts writes a lot treasuries tend to

follow down because uh people start

buying those increasing the price for

those as that high interest rate looks

like oh this isn't going to last forever

and then as the price of bonds goes up

the yields come down anyway Morgan

Stanley goes on to say that EPS forecast

will likely be lower if uh and price

stock prices could go down 22 23-ish

percent to the lows if we do go into

even a mild recession so in other words

they think what actually aligns with

just a mild recession is the S P 500 at

3 000. this is pretty bearish Outlook

because that's not even the hard landing

potential scenario here right and this

is despite the fact that they actually

believe the FED is going to come in and

have to cut rates they still think even

in the face of cutting rates we're going

to be hitting some pain and investor

expectations for earnings according to

Morgan Stanley remain too high based on

our forecasts and conversations with uh

clients now obviously what's driving a

lot of the excitement right now is this

idea that inflation is falling and

probably plummeting and that is true we

are seeing that however Morgan Stanley

also makes this argument that one of the

problems is when you see a prices come

down inflate like disinflation occurs

right you end up getting negative

operating leverage because you don't

have that room to raise prices anymore

this is just a fancy way of saying

margin is going to get squeezed so

prices come down down you get less

earnings growth with the same amount of

people you have then you start firing

people and trying to be more efficient

but you're still not getting to the

margin that you used to have during the

inflationary period where it was easier

to sort of raise prices up front and

then kind of grow into those higher

prices as you actually started getting

affected by higher inflation that add

net margins they believe are going to be

the big reason we actually see a big

downside in the S P 500 and so they

chart this for us they say here is a

chart of the contribution to the s p

500's trailing EPS growth trailing is

going to generally be looking at last 12

months right and what you can see here

is that the yellow is net margin and uh

the blue is sales per year and in

recessions like over here 2002-ish you

saw this 2009 2010 ish you saw this and

then over here in the covet pandemic you

you saw this this sort of negative

movement down the the biggest reason you

actually saw the stock market Fall was

in their opinion earnings per share year

over year plummeting and look at the

trajectory you're on right now we still

haven't even broken that zero percent

level in aggregate year over year so

they believe that year-over-year

earnings per share are going to go

negative for a lot of companies and it's

going to drag the S P 500 down and this

is where and I've mentioned this as well

I think it makes sense to look at

companies that are hopefully going to

have positive or very large earnings per

share reads going into 2023 compared to

2022. now that could be challenging

right you could look at a company like

uh n phase or Tesla or solar Edge and

you could hope that hey these companies

are all going to have especially end

phase and Tesla that they're going to

have positive EPS because they're

smaller right they're still in that

early growth phase where even if there

their growth Falls it's still positive

right but is that going to hurt their

PEG ratio end phase is a little

expensive right now even though the

price has been coming down it's a little

pricey right now when you look at it on

a PEG ratio basis then you look at

companies like Generac which is a little

bit more of a legacy player or for

example the chip manufacturers and then

you wonder have they actually hit bottom

yet on those EPS revisions you look at

what Samsung just reported and maybe the

answer to that is yes Samsung just

reported a decline of 69 percent and

basically in Revenue year over year a 69

drop huge tremendously huge drop what

happened the stock actually went up

as markets basically saw as saw the

Samsung's decline is now we already know

that the chip Market has been hit so a

lot of people look at chips Nvidia AMD

Taiwan semiconductors and say no no no

they've already bottomed out in the

stock cycle because Traders hedge funds

and institutions have taken their money

and they've run into defensives and

staple stocks Costco John Deere Lockheed

Martin whatever they've run into those

stocks and they already sold the chips

so we already have the baked in EPS

recession but the S P 500 in aggregate

does not and so this actually sets up

this really weird situation where

a lot of folks are starting to warn that

it's actually not going to be individual

stocks that get reamed in 2023 it's the

indices that get reamed in 2023 that

could be remarkable imagine chip stocks

growth stocks and Tesla end the year

positive 10 20 30 percent whatever and

the indices actually end up

underperforming with maybe a negative

five negative 10 negative 20 now who

knows that's just speculation but this

is what Morgan Stanley is arguing

now

when we continue this we start talking a

little bit about inflation and they

actually suggest and this is a really

fascinating piece by Morgan Stanley they

actually go as far as say that inflation

is likely to come down faster than most

are expecting including the Federal

Reserve that's good news on the surface

however the issue for Equity investors

is that a fallen CPI is lagged meaning

the FED will likely be unable or

unwilling to cut rates anytime soon

that's right I personally think we're

looking at the end of the year when it's

already going to be too late right

they're going to be stone-faced until

it's too late in other words falling

inflation is going to be a significant

headwind for profit margin giving the

sequence of costs falling later than end

price in other words you reduce the

price first and then you get destroyed

in margin at your companies and then the

disinflation starts hitting your costs

and your margin actually starts

rebounding big risk right this is

something we were talking about just the

other day you look at Tesla for example

they cut prices of some of their Chinese

Vehicles 23 percent the Bloomberg

commodity index for the year of 2022 was

down like 23 so you kind of have an

alignment there even though the

Bloomberg commodity index does not

include labor costs right which we know

those have been stable or up uh and and

the costs that go into a Tesla are not

just material costs they're labor costs

let's just even assume it's 50 50. right

that means you could potentially only

see an 11 or 12 percent impact from

Commodities or support from Commodities

but if that even takes longer to start

getting priced in into actual margins

because you have contracts that take six

months to roll over

whoof you can have some painful and

squeeze is on margin but then you wonder

how much has that already been priced in

because of the trend change of a lot of

Institutions and Traders running from

growth it's everything but growth right

now is what's sexy right anyway

continuing on

they say here that it is actually really

important to make sure that you don't

look at the bad reports as good see they

say we caution against interpreting the

status ISM prints as good in the context

of uh bad news is good news they

actually say we're approaching the point

where bad is bad for the indices bad is

bad for the indices now that's actually

a fascinating argument because well it's

something that we thought of at the

beginning of 2022 where we said look

good news is bad news bad news is bad

news everything's just bad at the

beginning of 2022. and this is this was

my inspiration for selling in January of

2022. now I didn't move my portfolio

perfectly the way I should have after

that but the signals were there and the

same signals I'm seeing now uh in some

cases concerning but in many cases in

reverse and so I'm trying my best to pay

attention to all these signals and just

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let's keep going here so the next page

that I'm going to bring us to we're

going to skip ahead just a tiny little

bit here margins and focus at companies

struggle to convert Top Line growth into

bottom line results that's called

negative operating leverage and cost

cutting measures such as layoffs are

becoming more common at the sector level

energy and Industrials have the highest

growth expectations while materials and

communication services are expecting

double-digit declines now here's what

they think in terms of sectors they

actually think that discretionaries and

communication Services could end up

being the leaders in 2023 for EPS growth

now they're not the biggest fans

personally of investing in those right

now they actually have the following

expectation for what their

recommendations are they still put

discretionary at today at least as

underweight calm Services as neutral

that's even as they expect those to end

up showing the most EPS growth in 2023

the big thing that concerns them is the

market is pricing in stable margins

margins are in focus and the market is

projecting stable Top Line margins and

if we look at that we can actually see

that right here there we go

but what concerns them is the fact that

the market is pricing stable margins and

so that's where they think the big hit

ends up coming across the board for the

indices is who's going to get whacked

with margins The Biggest Loser they

think is going to be energy

but we'll see what happens from there I

think my sort of take away from this

report is the following Morgan Stanley

is probably right that we are going to

end up seeing a Fed U-turn and cuts but

it'll be too late right this will we

will already be in the recession we will

be in recession when those cuts come the

market will try to pre-price that but

there was a risk that in between now and

that pre-pricing we end up getting a

collapse of earnings especially at

companies that ran in 2022 that's my

belief and it's something that you see

with Morgan Stanley as well because

they're telling you hey look S P 500

companies are being priced at 17.6 times

earnings and we think there's going to

be a an in aggregate downgrade in

earnings that only individual companies

with actual EPs and margin stability

those are going to be the ones that

perform but but most everything else

that did pretty decently in 2022

heads up some risk factors here and that

fed cut is going to come too late to

really help and that creates some

potential hardship still ahead of us

that means stay out of margin stay stay

as as uh you know limit your exposure it

doesn't necessarily mean paper hand

Panic oh my gosh 50 to 70 coming again

in fact some or many stocks like what we

saw with the chips could be nearing

their bottom already

but in aggregate the indices could get

hurt as we definitely start expecting to

see margin collapse which isn't pricing

it isn't priced in so margin collapse

not priced in that's a big problem

because then you get that negative

operating leverage which they're talking

about and that's really when you start

entering the painful recession and the

data they're seeing pretty much affirms

a recession now it's just a matter of

hey how hard does the FED want it to be

hopefully inflation continues to plummet

which they also see happening which is

optimistic but again the fed's not going

to flip-flop until we're probably

already in recession and that's the

painful part is they will realize that

this inflation ended up being transitory

their first thesis way too late just

like they were too late the first time

around and they were still printing

money in March of 2022 it doesn't make

freaking sense

anyway in my opinion my my sort of look

at this is you've got yourself a red

flag for the indices for 2023 uh

especially if you're sort of broad-based

investing into a lot of companies that

aren't prepared for that margin collapse

or don't have any kind of you know price

drops already priced in again you saw

what happened with Samsung they're down

substantially had a huge Miss on revenue

and margins stock actually went up it's

because the Market's already built that

into certain sectors

so that's why I personally think sectors

like chips and Tech and growth

have most of their pain behind them no

guarantees knock on wood anyway check

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the next one thanks bye