Morgan Stanley strategists said that investors prematurely took into account a possible pause in the Fed's tightening cycle, and such a mistake could cause a correction of the US stock market.
"The deterioration of fundamentals, along with the Fed rate hikes and the income recession, will lead to a sharp drop in the US stock market this spring," the strategists said, adding that the price is about as disconnected from reality as during this bear market.
Last week, the yield of 2-year US bonds exceeded the yield of 10-year bonds by the maximum amount since the early 1980s, indicating a decrease in confidence in the ability of the economy to withstand additional rate increases.
The US CPI data expected tomorrow could be a catalyst that will bring investors back to reality if consumer prices rise more than expected, strategists said.
According to Morgan Stanley forecasts, at the end of 2023, the S&P 500 index will trade at 3,900 points, which is about 4.7% lower than the closing level on Friday. Strategists said the stock is likely to fall as earnings estimates decline and then recover in the second half of the year.