U.S. stocks could fall sharply over the coming months if recession risks materialize, a top Wall Street bear cautioned Monday, as evidence of weakness in the world’s biggest economy mounts.
Morgan Stanley’s Michael Wilson, who turned positive on U.S. stocks last year, said the current market drawdown, which has the Nasdaq in correction territory and the S&P 500 suffering its biggest weekly decline in six months, is likely to last until the middle of the year.
From that point Wilson sees a “volatile” path to his 6,500-point end-of-year price target for the benchmark, as the market continues to contemplate these growth risks, which could get worse before they get better, he said in a note published Monday. His call for the year-end is 12.7% higher than the March 7 close just above 5,770.
Should the economy move toward recession, however, Wilson warned that stocks could fall another 20% from current levels, which has the S&P 500 now south of its Election Day close.
“We are not there but things can change quickly, and so it’s useful to know the downside in the bear case to manage one’s risk,” he said.
The S&P 500 is now down more than 3% for the month, and following its worst weekly performance in six months, the benchmark has wiped out all its post-election advance.
Wilson’s colleagues at Morgan Stanley aren’t forecasting recession either, but they’ve nonetheless lowered their full-year GDP growth estimate to 1.5% this year and 1.2% in 2026.
Tariff risks to weigh on growth
“Our forecast changes pull forward the anticipated effects of restrictive trade and immigration policies,” the investment bank said. “If our narrative entering the year was ‘slower growth, stickier inflation,’ then we now think ‘slower growth, firmer inflation.'”
“Earlier and broader tariffs should translate into softer growth this year, whereas we previously assumed it would weigh on growth mainly in 2026,” the bank noted.
The Bank of America economist Aditya Bhave has also argued that a soft landing “seems unlikely in the near term,” since the Federal Reserve likely will keep its benchmark lending rate unchanged for longer than markets anticipate.
Related: U.S. jobs cuts at 16-year high as trade war concerns hammer sentiment
“Weak survey data, soft consumer spending, large tariff increases and DOGE cuts have weighed on the growth outlook in the last two weeks. But upside risks to inflation have also risen,” Bhave said.
That view largely matches comments from Fed Chairman Jerome Powell. He told an economic event Friday that “uncertainty” tied to tariff policies is being offset by easing inflation pressures, which likely means the central bank remains in “no hurry” to change its key policy rate.
“Looking ahead, the new administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation,” Powell said. “It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy.”
“As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves,” Powell added.
Economy in a ‘good place,’ says Fed chairman
The Fed chairman also noted, however, that the U.S. economy “continues to be in a good place,” with solid labor markets and softening inflation pressures.
Last week, the Labor Department posted a weaker-than-expected jobs report, which showed 151,000 new hires during February. Still, the headline figure topped January’s tally of 125,000.
The Atlanta Fed’s GDPNow tracker suggests a current-quarter contraction of around 2.4%, but important inputs over the coming weeks could lift that reading into positive territory and allay recession worries for a few more months.
In a weekend interview with Fox News, however, President Donald Trump refused to rule out the chance of recession and defended his on-again-off-again tariff rollout as necessary in his effort to rebalance the economy.
Related: Fed chair Powell echoes worries in interest rate forecasts
“I hate to predict things like that,” Trump told Fox News’ Maria Bartiromo when asked if the economy faced recession risks.
“There is a period of transition because what we’re doing is very big. We’re bringing wealth back to America,” he added. “That’s a big thing, and there are always periods of, it takes a little time. It takes a little time, but I think it should be great for us.”
JP Morgan sees relief rally, says sell into the gains
With that in mind, HSBC analysts lowered their rating on U.S. equities to neutral in a note published Monday. Global Equity Strategist Alastair Pinder cited “better opportunities elsewhere for now” amid the trade and economic uncertainty.
The bank also suggested that stocks were pricing in a “mini earnings recession” for the S&P 500, although LSEG data continue to suggest a 5.2% advance for collective first-quarter profits.
JP Morgan analysts, meanwhile, suggest that stocks are set for a relief rally over the coming days, with the S&P 500 recovering some of its 1.9% in losses for the year, but urges investors to sell into those gains as economic risks accelerate.
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“After the worst weekly performance since September 2024, we think a rebound is more likely than another immediate decline,” JP Morgan analysts wrote. “But would you buy or fade a relief rally? Fade it.”
“The economy is slowing, and the trade war remains an unambiguous negative for both the market and the economy,” the investment bank added.
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