Investors who believe the stock market has priced in a recession after the recent stock market crash must think again.
Analysts Mike Wilson of Morgan Stanley and Nick Colas of Datatrek warn that the S&P 500 index may fall another 20 percent if there is an economic downturn, as many indicators suggest.
“At current pricing, equities are extremely unlikely to reflect the most likely future earnings scenario for companies if a recession occurs,” Colas wrote in an update, according to CNBC.
Wilson at Morgan Stanley says the recent rise in the stock market will not last.
“We continue to believe that any upturn in the short term will not last, with even lower levels ahead,” he says.
Stock market fall
The stock market year has already been very painful, and the S&P 500 has had its worst first half year since 1970.
So far this year, the index is down 18.7 percent.
Sentiment has risen on fears that the US Federal Reserve (Fed) will raise interest rates to tame inflation. At the same time, the war in Ukraine provides volatile markets.
This week, Goldman Sachs lowered its outlook for US gross domestic product in the second quarter. Wells Fargo expects a more aggressive policy from the Fed, and that a moderate recession may be in the offing.
Colas argues that a market decline is governed by how much the companies’ earnings decrease. In a mild recession, there is an average of 25 percent fall. If things get really bad, earnings could fall by 50 percent, writes CNBC.
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