Morgan Stanley’s Mike Wilson issues a correctional alert

Earnings season is likely to reveal the market's worrying

Morgan Stanley’s Mike Wilson is urging investors to brace for a winter downturn.

He warns S&P500 is prone to a 23% drop – bringing it to 3,000.

“Even though the majority of institutional clients think we’re likely to enter a recession, they don’t seem afraid of it,” the firm’s CIO and chief US equity strategist told CNBC’s Fast Money on Tuesday. “It’s just a big breakup.”

Wilson anticipates earnings season beginning with finance on Friday will shake up the market by falling well below expectations. He believes investors will be surprised at how dramatically earnings will need to be adjusted.

“That’s another area where investors are a little complacent,” he said. “Expenses are growing faster than net income.”

Wilson claims quarterly results are likely to trigger a 2023 reset on Wall Street.

“The estimate for the full year has to go down,” he added. “The negative operating leverage is really starting to flow through from the balance sheet to the income statement… This is a very underestimated development during Covid. We overearned during the pandemic because there was positive operational leverage.”

And investors could be in for a double whammy due to the timing of the Federal Reserve’s next interest rate decision on February 1st.

“Our view is based primarily on earnings and the fact that the Fed is unlikely to react to a slowdown as quickly as it has in the past,” Wilson said. “They will not cut rates in a growth slowdown.”

His year-end price target for the S&P 500 is 3,900, which is the second lowest in the stock market. With just six trading days on the books, the index is up 2% so far this year and more than 12% since the Oct. 13 low.

“When we actually talk to people, they talk about a bearish game about the first half. But they’re either not really positioned for it or they don’t really think it’s going to be that bad,” said Wilson, who has been defensively positioned since last year.

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