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Morgan Stanley’s S&P 500 target hints bear market not over, but predicts upside in commodities


So far this year, the S&P 500 index has tanked 18.2% as inflation fears monetary policy tightening, and geopolitical worries take centre stage. Earlier on Wednesday this week, the S&P 500 index fell 4.04%, its biggest single-day fall since the middle of 2020. However, the bears are not done yet. According to targets pinned by Morgan Stanley’s equity strategists, S&P 500 could fall to 3900 points in the base case scenario and even further if things continue to go awry on Wall Street. “We see further de-rating and US weakness,” said Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist. 

Bears not done yet

S&P 500 is currently at 3923 after Wednesday’s massive fall. Further, 3350 has been pinned on the index if things got worse. Analysts at Morgan Stanley believe that the recent volatility in US equities isn’t unfounded. They added that the downward earnings revisions and weakening Purchasing Managers’ Index (PMI) suggest the bear market is not finished.

Economists at Morgan Stanley believe that the current situation is “the most chaotic, hard-to-predict macroeconomic time in decades”. “So far, 2022 has not only seen a tragic conflict in Europe, but it’s also brought the worst bond market performance since 1980, the biggest commodity outperformance since data began in 1960, and large moves within and between equity indices,” said Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley Research. Sheets and his team recommend staying defensive, diversified — and patient.

But, there’s hope

Heading into the second half of 2022, although the outlook on the index level is bearish, Morgan Stanley believes there are some asset classes that can go up. Given supply shocks and war in Ukraine, it’s no surprise that commodities are on track to outperform equities for the second consecutive year — and energy commodities still have the potential for upside, strategists say. For Brent crude oil, Morgan Stanley’s energy team thinks it will rise to $130 in the third quarter of this year. 

Further municipal bonds and Mortgage-backed securities are hot on their list. Analysts at Morgan Stanley believe that with average 30-year fixed-rate loans having recently reached their highest levels since 2009, now may not be a great time to shop for a mortgage, however, Residential mortgage-backed securities (RMBS), are attractive to them, particularly relative to corporate credit. Andrew Sheet of Morgan Stanley advises investors to stay light on overall exposure, with equal weight in global equities, bonds and spread products, including mortgage-backed securities.

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