The latest GIC report from Morgan Stanley, published Dec 12, 2022: https://www.morganstanley.com/pub/content/dam/mscampaign/wealth-management/wmir-assets/gic-weekly.pdf
The first paragraph lays out MS' current thinking and positioning:
“Recent US equity resilience has been based largely on a belief that the Federal Reserve will execute a soft landing in 2023, forestalling the current bear market. That view has been expressed in a consensus 2023 S&P 500 earnings per share (EPS) projection of $230, which contrasts with our $195 forecast that assumes nonrecessionary profit declines amid lower corporate pricing power and sales volumes. One way we could be wrong is if cost cutting proves historically effective, but that would likely take a toll on consumption and employment, accelerating an economic slowdown. While such a scenario would prompt the Fed to cut rates, it would likely increase recession odds. Alternatively, labor market strength and consumer spending could surprise to the upside, helping to sustain profits. In such a scenario, however, risks around “higher for longer” fed funds rise, resulting in a threat to equity prices from lower valuation multiples, rather than weaker earnings. There are always three ways to be wrong about the market: by misjudging multiples, earnings or both. With uncertainty around those variables historically high, we prefer to harvest risk premium for the privilege of waiting. Consider tax-loss harvesting— especially passive index positions—and investing proceeds in yieldproducing assets like Treasuries, municipals, corporates, MLPs, residential REITs, and value-oriented and high-dividend equities.”
The chart of the week is fascinating and reflects the tremendous uncertainty: “The divergence in S&P 500 price targets from market strategists has only been this wide once in the last 15 years.” The chart shows a spread of ~32% which is just below the peak from 2009 ~33%.
Obviously the focus is on the Fed: “We have noted that the peak fed funds rate has historically occurred when the Federal Reserve has managed to raise the policy rate above its preferred measure of inflation—the core Personal Consumption Expenditures Index (PCE). With core PCE still running at just over 5%, even next week’s anticipated 50-basis-point hike suggests the Fed has more work to do. The fed funds futures curve agrees and is pricing two more 25-basis point hikes between January and May 2023.”
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