Morgan Stanley says U.S. stocks set to drop another 10% before bottoming as recession chance now doubles

S&P 500 to fall another 10% before current bottom economic recession-fuel bear market for U.S. stocks, said Morgan Stanley Wealth Management’s chief investment officer.

Chief information officer Lisa Shalett said the odds of two consecutive quarters of negative U.S. economic growth have doubled since the Federal Reserve raised interest rates by 75 basis points on June 15 — making a stock market slide more likely.

“Accelerated Fed tightening doubles the odds of a recession,” Shalett said in his weekly report on Monday. “The bottom of the bear market is probably 5-10% away.”

The S&P 500 entered a bear market after falling more than 20% so far this year as investors grappled with rising inflation, rising interest rates and recession risks. U.S. stock indexes’ recent gains appeared to fade on Tuesday as a sell-off in big tech stocks dragged it down 2.01%.

With investors yet to digest the Fed’s newfound tightening stance, the market will drop another 10% before bottoming out, Shalett said. The Federal Reserve raised interest rates by 75 basis points this month, the largest rate hike since 1994.

“Analyst consensus forecasts for the S&P 500 have continued to rise, while earnings revisions have turned negative and GDP growth forecasts have been revised down,” she said.

Shalett noted that the index rose 4.7% after the Fed’s latest move, even though rising interest rates tend to spark a sell-off in stocks.

But while a Fed-induced recession looks increasingly likely, Shalett said investors shouldn’t worry that it mirrors 2008, when the S&P 500 plunged more than 20% in a week. Inflation-related recessions tend to have a much smaller impact on stock returns than credit-related recessions, she said.

“This recession will be inflation-driven, not credit-driven,” Shalett added. “This means that peak-to-trough returns could fall by less than 15% as nominal prices buffer weaker real volumes.”

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