Morgan Stanley: 2022 Mid-Year Takeaways

As we enter the second half of 2022, the market is signaling a continued de-rating of equities, lingering challenges for consumers, and an increased bearishness among equity investors.

Here are some key takeaways brought by Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley in the podcast Thoughts on the Market.

What you'll get:

1. Perspectives on different sectors, such as consumers, technology and the crowded energy sector.
2. Outlook and the market trend for $S&P 500 Index (.SPX.US)$.
3. Market sentiment and views on rebound.
...
First, the de-rating of equities is no longer up for debate.

However, there is disagreement on how low price earnings multiple should fall. We believe the S&P 500 price earnings multiple will fall towards 14x, ahead of the oncoming downward earnings revisions, which is how we arrive at our near-term overshoot of fair value of 3400 for the S&P 500.

We have found many technology investors are now on our page and more worried about companies missing forecasts. While some may view this as bullish from a sentiment standpoint, we think it's a bearish sign as formerly dedicated tech investors will be more hesitant to buy the dip. In short, we believe technology spending is likely to go through a cyclical downturn this year, and it could extend to even the more durable areas like software.

You might like: Indicators to evaluate the financial success of a company

Finally, energy is the one sector where a majority of investors are consistently bullish now.

This is not necessarily a contrarian signal in our view, but we are a bit more concerned about the recent crowding as energy remains the only sector other than utilities that is up on the year. With oil and gasoline prices so high, there is a growing risk we have reached a level of demand destruction. We remain neutral on energy with a positive bias for the more defensive names that pay a solid dividend.

You might like: Why Dividend Investing Is Back?

Bottom line, equity clients are bearish overall and not that optimistic about a quick rebound.

While this is a necessary condition for a sustainable low in equity prices, we don't think it's a sufficient one. While our 12 month target for the S&P 500 is 3900, we expect an overshoot to the downside this summer that could come sooner rather than later. We think 3400 is a level that more accurately reflects the earnings risk in front of us, and expect that level to be achieved by the end of the second quarter earnings season, if not sooner. Vicious bear market rallies will continue to appear until then, and we would use them to lighten up on stocks most vulnerable to the oncoming earnings reset.

You might also like: How to Pick Stocks Like Masters