- Morgan Stanley predicted that stocks could fall about 10% between now and the November election.
- The bank's Mike Wilson said this was because corporate earnings were weak and needed several catalysts for improvement.
- Other forecasters have warned that stocks appear overvalued and a correction is on the way.
According to Morgan Stanley's Mike Wilson, shares are expected to fall by double digits.
The bank's chief investment officer and chief strategist for U.S. equities warned that a stock market correction is looming due to a shaky outlook for corporate earnings and the economy ahead of the presidential election.
“If you report poorly, you get punished. That's been going on all year, and that's why average stock prices are down this year,” Wilson said in an interview with Bloomberg on Monday.
The S&P 500 has been smashing record highs this year, but the benchmark index has been buoyed primarily by a handful of growth stocks that are delivering outsized returns amid investor enthusiasm for all things artificial intelligence.
The weak earnings outlook is also being compounded by slowing inflation and pressure on corporate profits as companies lose pricing power, Wilson said.
“The average company is not delivering good earnings performance,” he added.
Wilson said several changes are needed for stock prices to continue rising, pointing to a variety of obstacles including high interest rates and a tight labor market.
Wilson added that these obstacles typically disappear once the economy enters a new economic cycle, noting that the Russell 2000 Index of small-cap stocks typically delivers big returns after a recession. Until then, he suggested, investors are risking a sharp drop in stocks.
“What worries me is that the momentum is so strong, and if something unexpected happens, stocks could reset as much as 10 to 15 percent,” Wilson said of stocks. “I think it's very likely we'll see a 10 percent correction between now and the election.”
Other forecasters have warned that stocks are at risk of a near-term correction given their high prices, with prominent bears like John Hussman and fund manager Mark Spitznagel warning of a double-digit crash, drawing parallels between the current market and past market bubbles.
