Morgan Stanley's Mike Wilson says US stocks could crash another 20% as the risks of a recession rise

• Morgan Stanley's Mike Wilson has said the risks of a recession are rising and stocks could fall another 20% if growth goes into reverse.
• The chief US equity strategist said that even if the economy avoids recession, stocks still likely have a way still to fall.

Morgan Stanley's chief US equity strategist has said the risks of a recession are rising and that stocks could tumble another 20% if economic growth goes into reverse.

"At this point, a recession is no longer just a tail risk given the Fed's predicament with inflation," Mike Wilson, who was ahead of much of Wall Street in predicting a sharp drop in stocks, said in a note Tuesday.

Wilson said Morgan Stanley's economists now put the chance of a recession over the next year at 35%, up from 20% previously. But he said he personally thinks the chances are a bit higher.

The strategist said that although stocks have fallen sharply, they are not yet at levels reflecting a recession.

He said the S&P 500 would likely tumble to 3,000 if the US economy started to go backwards — roughly 20% lower than Tuesday's price.

But Wilson said he sees more downside for equities even if the US economy manages to avoid a recession.

He said the S&P 500, the US benchmark index, is likely to fall by another 7% to 10% — to around 3,400 to 3,500 from roughly 3,770 on Tuesday — as company earnings suffer under the weight of inflation.

The index has already tumbled more than 20% from its recent high in early January, as the Federal Reserve hikes interest rates to tame the strongest inflation in 41 years.

"We recognize a lot of pain has already been inflicted during this bear market. Nevertheless, we can't yet get bullish," Wilson said in the note.

"We see a pretty poor risk reward over the next 3-6 months with recession risk rising in the face of very stubborn inflation readings."

Wall Street analysts have lowered their expectations for US growth following the Fed's 75 basis point interest rate hike last Wednesday, which was the biggest increase since 1994.

In recent days, Goldman Sachs said the risk of a recession within the next year has doubled to 30%. Nomura said the US would now enter a long but shallow recession before 2022 is out, and Deutsche Bank said growth would now grind to a halt earlier than it previously expected.

Nonetheless, Wilson said many analysts still expect company earnings to be too strong, given issues including high inflation and slowing consumer spending.

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