US stocks will keep falling even if the economy dodges a recession, Morgan Stanley's top strategist says

Stocks have fallen sharply in 2022.

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• US stocks are set to keep falling even if the economy avoids a recession, according to Morgan Stanley's Mike Wilson.
• Wilson said analysts are too optimistic about company earnings, which are likely to slow sharply as inflation bites.
• He expects the S&P 500 to stand at 3,900 in a year's time, only a shade above Monday's level of 3,890.

The sell-off in US stocks isn't over yet, according to a market analyst who correctly predicted this year's slump.

Mike Wilson, chief US equity strategist at Morgan Stanley, said the recent rise in those stocks is likely to fade, as companies come under increasing pressure from higher inflation and interest rates.

"Counter-trend rally may continue, but make no mistake, we don't believe this bear market is over, even if we avoid a recession — the odds of which are increasing," Wilson said in a note to clients Monday.

Wilson said Morgan Stanley now thinks there's a 36% chance of a US recession in the next 12 months. He pointed to rising jobless claims and falling job openings as signs that the economy is cooling.

He said company profit growth is likely to fall sharply over the coming quarters, and that most analysts are too optimistic about company earnings and profit margins.

"The combination of continued labor, raw material, inventory, and transport cost pressures coupled with decelerating demand poses a risk to margins that is not reflected in consensus estimates, in our view," Wilson said.

Morgan Stanley expects these pressures to continue to weigh on stocks over the next year. It predicts the S&P 500 will stand at 3,900 points in a year's time — only a tiny bit higher than Monday's level of around 3,890.

US stocks have fallen sharply this year, with the S&P 500 down around 18% from its recent high at the start of January. The index has risen around 6% over the last month, with some investors believing the sell-off has been overdone.

Read more: The chief strategist at one of the world's biggest brokers says investors should 'back the truck up' to use this great opportunity to buy cheap stocks - and lists the parts of the market she likes the most

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