There’s a “vigorous debate” going on right now around the outlook for equities, and particularly US shares, which are either in a bull market or a bear market depending on what day it is and who you’re listening to.

The “vigorous debate” language comes from Morgan Stanley’s Mike Wilson, who on Monday sent around a 70-page slide deck in an effort to ensure maximum exposure to “the data that informs” his concerns regarding elevated near-term drawdown risk for the S&P.

To call this familiar territory would be to understate the case. Wilson’s views on the situation are well-known, even as he pretty clearly believes the message isn’t getting through.

The deck was a veritable cornucopia of bearishness which, if you were seeing it for the first time, might drive you straight to the bottom of a Cragganmore bottle. (I should be so lucky, right?)

I’ve been over Wilson’s thesis (every aspect of it) so many times that I’m not sure what else there is to say, but I nevertheless felt compelled to mention the deck and the accompanying color, considering it was (predictably) given top billing across mainstream financial media outlets to start the week.

“In our view, the headwinds significantly outweigh the tailwinds,” Wilson said, of stocks. “Our highest conviction view remains our well below consensus forecast for earnings this year,” he added. As a reminder, Morgan Stanley’s base case for 2023 S&P EPS is $185. That’s $35 (!) below bottom-up consensus. It’s also at least $20 below what Wilson typically presents as a kind of blended top-down / buy-side consensus, which he puts at between $210 and $215.

As the red and green annotations show, Wilson expects an earnings “boom” in 2024, but only after this year’s “bust.” “While last year’s earnings misses were mostly a function of bloated cost structures as pandemic demand normalized, we believe the next leg will be about deteriorating pricing and top-line disappointment,” he reiterated.

Wilson is steadfast in the view that waning pricing power (as inflation recedes) will mean a sharp slowdown in top-line growth to the further detriment of corporate bottom lines, which are already under pressure. And he’s highly skeptical of the notion that stocks priced in a recession (any sort of recession, earnings or economic) at October’s lows.

This comes at a time when the Fed is still locked in. Typically, monetary policy is easing when earnings recessions are afoot, but not in 2023.

Note that the disparity illustrated on the right-hand side in the figure above depends on Wilson’s earnings forecast panning out. If he’s wrong, and the rate of change for corporate profit growth has troughed (or is about to trough), then a “higher for longer” Fed stance won’t appear so incongruous. If he’s right, though, the Fed would be leaning into a pretty deep earnings squeeze.

The spread between Morgan Stanley’s non-PMI lead indicator for earnings growth and bottom-up consensus has only been wider one other time: In late summer of 2008. The gap closed alongside a 49% drop for equities.

Speaking of 2008, the table below compares August of that fateful year to current conditions. The yellow highlights are meant to underscore various risks.

There’s a lot of tension inherent in the “Today” column. Wilson suspects it’ll be resolved in a way that’s unfavorable for risk assets.

He walked through all the other pillars of the bear case which, again, are familiar, certainly to any regular reader. There’s the liquidity issue, for example. “Morgan Stanley estimates bank reserves will contract by $500-800 billion over the next six months, which is likely to have a negative impact on equity valuations which are back to cycle highs even though interest rates (both nominal and real) are also at cycle highs and unsupportive,” he wrote. (How much reserves contract depends in no small part on how much bill supply is absorbed through RRP transformation.)

Then there’s the fading fiscal impulse. “Fiscal support has been much higher over the past 12 months than most investors appreciate based on our conversations,” Wilson went on. “This is expected to peak and reverse next month and could amount to a 6ppt headwind to nominal GDP over the next 12 months.” JPMorgan’s Marko Kolanovic voiced similar concerns in his mid-year outlook.

And don’t forget about the technicals. They’re unfavorable too, Wilson warned. “The technical picture remains poor with recent breadth improvement failing yet again,” he wrote. “If our view on earnings is wrong, breadth should be improving.”

You get the idea. Mike is sticking with it. “We believe risks for a major correction have rarely been higher,” he declared.