S&P 500 Index to decline 10% and end the year at the 4000 level – Morgan Stanley

Lower than consensus earnings for next year and lower valuations could make the road ahead for the S&P 500 Index a bit bumpier. Mike Wilson, Chief Investment Officer and Chief US Equity Strategist for Morgan Stanley, expects a greater than 10% correction in the coming months.

Valuations are vulnerable in the short-term

“We are raising our earnings forecast after the strong 2Q results and we now expect $205 per share for the S&P 500 and 2021. We're not as bullish on earnings growth for 2022 as the consensus given our view there will be payback in demand and profitability.”

“The combination of lower than consensus earnings next year and lower valuation leads us to believe there is very little upside, if any, to major US equity indices over the next few quarters. In fact, our S&P 500 target price for year end is 4000, which is 10% below current levels. Between here and there, we expect a greater than 10% correction.”

“The recovery is well underway, and we think the Delta variant will prove to be manageable as vaccines and natural herd immunity allow for us to fend off further lockdowns. This is well understood by markets and now expectations may be a bit too high on earnings growth leaving valuations vulnerable in the short term. This is all very normal at this stage of any economic recovery.”