Stocks are set to fall further in 2023, and investors haven't priced in a growth slowdown with inflation set to hammer corporate profits, Morgan Stanley CIO says

• "The growth slowdown is not yet priced," Morgan Stanley CIO Mike Wilson told CNBC on Thursday about the potentially rough ride lower for the S&P 500 next year.
• Wilson has been warning of a potential drop in the S&P 500 to 3,000 in the first half of 2023.

Inflation is pulling back from hotter levels, but the looming US contraction has yet to be fully reflected in equities, Morgan Stanley's top stock strategist said Thursday in highlighting the firm's projection of a steep slide in the S&P 500 next year.

Labor Department data released this week showed consumer price inflation in November rising to 7.1%, the lowest reading since December 2021. It remains well above the Federal Reserve's 2% inflation goal.

"CPI's peaked. Inflation's peak. We're pretty confident it's going to come down pretty hard next year. And the real question is, 'What does that mean about growth?,'" Mike Wilson, Morgan Stanley's chief US equity strategist, said on CNBC.

He added: "That's the second part of our bear-market story that we've been talking about for almost 12 months now. The growth slowdown is not yet priced. And that's what's going to determine the winners — it's a stock-picking game."

Wilson has projected a potential drop in the S&P 500 to 3,000 in the first half of 2023. Such a decline would represent a 25% tumble from Wednesday's closing price of 3,995.32. The index during 2022 has lost nearly 19%, with a selloff taking place Thursday on recession worries after the Federal Reserve on Wednesday raised interest rates for a seventh time in 2022.

Investors appear to accept that easing inflation will mean corporate per-share earnings estimates are coming down, Wilson said in Thursday's broadcast.

"But it's the magnitude of that decline and how fast that's going happen, we think that's where the surprise is — that the negative operating leverage that we see from falling inflation, by the way, is what's going to hurt margins and that's irrespective of whether we have an economic recession."

Morgan Stanley in August said the majority of sectors were experiencing negative operating leverage, or sales growth exceeding per-share earning growth.

The S&P 500 during Thursday's session was down by nearly 3% at around 3,887.