US markets in 'death zone' – Morgan Stanley

The bank’s chief analyst expects the benchmark S&P 500 to slump sharply

US stocks have soared to unsustainable highs and could crash 26% within months, Morgan Stanley's top strategist has warned.

In an analyst note the bank's chief US equity strategist, Mike Wilson, said that the current level of stock valuations could be compared to the “death zone,” a term in mountaineering describing an altitude so high that climbers do not have enough oxygen to breathe.

“Many fatalities in high-altitude mountaineering have been caused by the death zone, either directly through loss of vital functions, or indirectly by wrong decisions made under stress or physical weakening that lead to accidents,” Wilson wrote.

“This is a perfect analogy for where equity investors find themselves today, and quite frankly, where they've been many times over the past decade,” he added.

The metaphor indicates the excessive levels that stock prices have climbed to since the start of this year. Wilson suggested the S&P 500 could tumble to 3,000 points within months, down about 26% from current levels, saying that “it’s time to head back to base camp before the next guide down in earnings.”

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The grim forecast follows what many analysts have called the worst year for the stock market since the 2008 financial crisis. All three indexes tumbled in 2022 with the Dow Jones Industrial Average ending the year down 8.8% while the S&P 500 sank 19.4% and the Nasdaq Composite plunged 33.1%.

“The bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn't coming,” Wilson’s latest note said.

The strategist has repeatedly warned that the market rally won’t last as he expects inflation to prove stickier than many other economists forecast, forcing the US Federal Reserve to hike rates in order to bring soaring prices under control.

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