FX.co ★ S&P 500 unlikely to rally by year-end

According to Morgan Stanley strategist Michael Wilson, the probability of US stocks rallying by the end of 2023 is close to zero. The market is under pressure from multiple risks, including overly optimistic earnings estimates and the Federal Reserve’s monetary policy tightening.

The analyst admits a further decline in the benchmark S&P 500 index, with "earnings expectations likely too high for the fourth quarter and 2024, and policy tightening likely to be felt from both a monetary and fiscal standpoint."

In recent months, Wall Street’s main index has been trading mostly downwards on fears that the Fed’s tightening cycle is not yet over. Notably, the S&P 500 index has already notched its third-straight losing month. Since early August, it has lost over 7%. At the moment, US equities are down 1.26% to the 4,224.15 mark.

Data compiled by Bloomberg Intelligence shows that Wall Street currency strategists anticipate a decline in S&P 500 firms’ earnings in the third quarter of 2023. At the same time, experts predict a 5.2% rebound in earnings in the final quarter. Forward 12-month profit estimates have also soared to record highs.

Wilson's short-term outlook suggests that the S&P 500 “will have a hard time.” The benchmark index is unlikely to get back above the 4,300-4,400 levels previously acting as support, weighed down by elevated profit estimates, current stock valuations, as well as US monetary policy. The strategist expects the S&P 500 index to dip by nearly 8% to hit a year-end target of 3,900.