Stock market outlook: Earnings drop represents final chapter of bear – Markets Insider

US stocks are in for a world of pain in the first quarter or 2023, but not for reasons most investors may think.
Morgan Stanley’s Mike Wilson said investors need to shift their attention away from high inflation and the Federal Reserve’s response to said inflation via potential interest rate hikes, and instead towards the looming decline in corporate earnings.
To ignore the two main driver’s of the stock market in 2022 is a tough thing to do, especially considering this week’s release of the November CPI report on Tuesday and the Fed’s interest rate decision on Wednesday, but according to Wilson, “it’s yesterday’s news.”
Tomorrow’s news, according to Wilson, is ongoing profit margin compression and the looming decline in earnings power, which Wilson expects to be meaningful next year. 
“We believe costs will remain elevated and prices received by companies will fall, creating negative operating leverage and a very challenging environment for earnings,” Wilson said.
Wilson sees the S&P 500 generating $195 in operating earnings per share next year, and that’s not yet priced into the stock market. According to data from Bloomberg, the average 2023 EPS estimate for the S&P 500 is $215.
“Only ~1/3 of the index has seen 2023 earnings estimates fall more than 10%. This leaves plenty of room for estimates to be cut further and the revisions down have only just begun, in our view,” Wilson said.
As Wilson sees a big earnings decline ahead that’s well below consensus estimates, he also sees a big decline in the S&P 500, with the index falling to as low as 3,000 in the first quarter of next year. That would be a decline of about 24% from current levels.
Part of Wilson’s bearish forecast is based on the knock-on effects from such a sharp drop in corporate earnings: layoffs. 
“The magnitude and timing of the earnings decline we expect implies that labor market risk may be underappreciated,” Wilson said.
According to Wilson, there’s a similarity between today’s market and corporate earnings dynamic and that of the summer of 2008, a time when investors failed to appreciate the magnitude of a potential earnings drop.
“We recall a similar set up in August 2008 from an EPS standpoint to remind investors the market usually takes longer to price such earnings declines than one might think/expect,” Wilson said.
The flipside to Wilson’s bearish market views is that this is the “final chapter” to the current bear market, granted, no one knows how long this chapter will last.
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