The US economy has been in a robust state for most of 2018, driven by a corporate tax cut and increased government spending. GDP rose by 4% in the second quarter and 3.5% in the third quarter of 2018 - but the recent stock market woes are a sign that growth might be faltering.   

A month ago, 114 S&P 500 stocks were dragged down to new 52-week lows, a number that rose to 175 on Tuesday.

CBOE S&P 500 Index performance, NASDAQ interactive chart, as at 29 November

 

Mike Wilson, Morgan Stanley‘s [MS] Chief Investment Officer, who foresaw this year’s sell-off in US stocks, thinks the bull market is already over and that investors just don’t realise it yet.

More than 40% of the S&P 500 stocks are already in a bear market, falling at least 20% according to Morgan Stanley, which has warned investors to avoid US stocks in 2019 and look to emerging market stocks instead. 

Throughout 2018, many investors sold-off their shares in the MSCI index, which has fallen by 18% so far this year, to buy up more assets in the US. However, Morgan Stanley expects the index to rise 8% by the end of the year, outperforming the 4-5% forecast for both the S&P 500 and MSCI Europe index.

Over 40%

Percentage of S&P 500 stocks already in a bear market

Slew of dim forecasts 

As major firms release their forecasts for next year, both Goldman Sachs [GS] and JP Morgan [JPM] expect growth to slow below 2% in the second half of 2019, with many economists going as far as to predict a recession for 2020. 

Ray Dalio, founder of Bridgewater Associates, believes that low returns have settled in for a “very long time”, as Wall Street has squeezed as much fiscal stimulus it can from low interest rates and tax breaks.    

Morgan Stanley’s Wilson foresees more stagnating performances from major indexes in 2019 and expects no growth for the S&P 500, predicting it to finish at 2,750, just 3% above current levels.

“We expect another range-bound year driven by disappointing earnings and a Fed that pauses… there is a greater than 50% chance we experience a modest earnings recession in 2019, defined as two quarters of negative year-over-year growth for S&P 500 EPS,” Wilson said.

As expectations are reset for the year ahead, stocks are expected to swing widely with the S&P 500 likely to be trapped in a range of 2,400 to 3,000 next year, according to Wilson. 

“… there is a greater than 50% chance we experience a modest earnings recession in 2019, defined as two quarters of negative year-over-year growth for S&P 500 EPS,” - Morgan Stanley CIO, Mike Wilson

Bank of America [BAC], Credit Suisse [CSGN] and Barclays [BARC] all predict the S&P 500 will have a modest rally to 3,000 by the end of this year.  

“We suspect that we’ll see a peak in equities next year, but bearish positioning and weak sentiment in stocks present upside, especially if trade risks subside, keeping us constructive for now,” Savita Subramanian, Bank of America’s chief equity strategist, said.