us stocks crash

While US stocks tumbled on the first trading day of 2023 they have since recovered and closed with gains for three consecutive weeks. Many Wall Street analysts meanwhile believe that the worst is not over yet and the rally would soon fizzle away and pave way for yet another crash.

US stocks had a tumultuous 2022 and the S&P 500 fell almost 20% while the tech-heavy Nasdaq Composite crashed 33%. Dow Jones Industrial Average outperformed other indices with a loss of only about 9%.

The price action of leading indices was not hard to comprehend as tech stocks underperformed the markets and none of the FAANG stocks could outperform the S&P 500 last year.

Meanwhile, US stocks rebounded in 2023 partially because of the continued fall in inflation. Both the CPI and wholesale inflation fell 0.1% month-on-month in December. Higher inflation took a toll on US stocks last year. There is however a list of investments that can do well in periods of high inflation.

Coming back to the US stock markets, the rebound in January took most analysts by surprise. Now, many observers are doubting the longevity of the rally and calling for markets to crash.

Incidentally, we saw something similar in 2022 when most stock markets rallies were followed by a slump and markets fell to newer lows multiple times.

Are US Stocks Going to Crash in 2023? Morgan Stanley Believes So

Morgan Stanley’s chief U.S. equity strategist Mike Wilson got his market calls almost spot on in 2022. He expects US stocks to crash in 2023 and believes that markets are not yet pricing in a slowdown in earnings.

He also said that while inflation has come down, costs for businesses are sticky. Wilson also pointed to negative operating leverage for companies.

We’ve indeed seen the theme play out in recent corporate earnings. While revenue growth for names like Microsoft and Netflix fell to low single digits, their profits fell YoY on higher costs.

Netflix stock meanwhile soared despite Q4 2022 profit miss as its subscriber number shattered estimates. There is a beginner’s guide to buying Netflix stock.

Coming back to Wilson, he said, “The final stages of the bear market are always the trickiest and we have been on high alert for such head fakes, like the rally from October to December we anticipated and traded.”

He added, “Our view has not changed as we expect the path of earnings in the U.S. to disappoint both consensus expectations and current valuations.”

Wilson also does not see the potential for expansion of trading multiples which could have helped offset the fall in corporate earnings.

JPMorgan is “Outright Negative” on Stocks

JPMorgan’s chief market strategist Marko Kolanovic has echoed similar views and said he is “outright negative” on stocks and expects them to fall in double digits.

Kolanovic is also circumspect about US consumer spending. He said, “The consumer took a lot of debt. Interest rates went up. The consumer was resilient, and that was sort of our thesis last year… But as time progresses, they’re less and less resilient.”

Wilson also has similar views and pointed to the fall in retail sales to corroborate his views that consumer spending is fading, if not outright crashing.

Kolanovic meanwhile expects the Fed to pivot to rate cuts sometime soon as US stocks crash. He said, “At some point, they’ll [the Fed] backstop it. So, the big question is where. Is it [the S&P at] 3,600? 3,400? 3,200? We don’t have a very strong conviction. But we do think lower is the direction.”

Markets Await Earnings and Fed Meeting

Next week, we’ll get earnings from several giants including Apple and Amazon which would help provide more insights into the US economy. The all-important FOMC meeting would also conclude on February 1 where consensus calls for a 25 basis point rate hike.

Former Treasury Secretary Larry Summers has warned central banks against lowering the guard against inflation. His views are in contrast to some of the other economists who believe that the Fed should pause its rate hikes.

Wharton professor Jeremy Siegel believes that the Fed has won the war against inflation and predicts a rise in US stocks.

Summers meanwhile warned against lowering the guard against inflation even at the risk of a recession. He said that if the central banks get complacent with inflation in order to boost the economy, they would risk an even more severe recession in the future.

Fed’s rate hikes, recession fears, and the fallout of FTX bankruptcy have also taken a toll on digital assets. We have a guide on whether crypto is recession-proof.

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