23 percent to go. That is what a new report from Morgan Stanley sees. We're going to go through this report right now, so they suggest that weaker earnings and a Fed commitment to fighting inflation make 3 900 for the S P 500 an easy sell. And in this story, they're going to go into exactly why they have this thesis.

So let's get right into the meat of the matter. First, they actually think that most of the consensus could end up being right that the first half of the year ends up quite challenging for markets, but the second half of the year will be better and hopefully and in some cases much better the some cases being which stocks you end up picking personally I Believe you're going to see a really big rotation away from the stocks that did really well last year, which really only got big inflows because of trends like McDonald's why is it only down 1 percent when its revenues down eight percent? Ah, right. Because that's what people do they shift into Staples When we're walking into a recession, recession comes. People potentially then rotate back to the growth stories they think are going to pull us out of the recession.

and at least that's how I'm positioning by looking for pricing power stocks I Think it's too late personally to be heavily short this Market I Think that creates a lot of risk, but that's my personal opinion. Morgan Stanley Believes that they we will all face a mild recession that starts in the first half and after the recession starts. Morgan Stanley actually believes that the FED will end up cutting rates in response. Now, this is something that we've already seen starting to get priced into markets that we're expecting potentially 175 basis points of cuts by the end of 2023 based on what the bond Mark is projecting and a total of 500 basis points of cuts before this entire Titan air or this entire sort of Fed cycle we've gone through is over.

That could be a total of potentially three years right to go. But anyway, they do give this caution though. They say that the data we're seeing rarely does not lead to a recession. In other words, the data is coming in so bad right now.

these are like ISM surveys for prices paid for new orders, manufacturing right? These sets of data are coming in so bad we have not seen, uh, or I Should say we rarely see the not recession scenario play out. However, that recession could end up being a software session, sort of a mild recession. And of course that's the debate. Now we're going to see a hard Landing or a soft landing and Morgan Stanley believes this is actually where short-term market price risk really exists Because basically they're saying look, part of the market is pricing in a hard Landing part of the market is pricing in a soft Landing That creates optimism and they believe even though we're going to end up seeing a recession in Fed Cuts between now and then, you could still see another 23 downside as the overall margins at companies that don't have pricing power I Hate to say it, but like a lot of the Legacy companies in the S P 500 actually drag the index down.

And this is why it's so important to pay attention to companies in my opinion with pricing power as we actually go into recession Now they suggest the reason they feel this is because they've seen exactly this in August of 2001 and in 2008 immediately before the actual recession hit in Earnest and dropped out. Uh, and the bottom dropped out on valuations. Basically, we had the valuation compression leading into the recession which would be the beginning of 2000 to August of 2001 and 2000 really like 7 to 2008. Then you saw the bottom drop out.

And that's because first you see sort of that compression of fear of multiples or of those trades where everybody sort of runs to like the Staples and the defensive stocks right? And then you actually see EPS drop across the board. And if you look at the S P 500 before we talk about the S P 500 quick reminder: The programs on building your Wealth prices will be changing before the end of the month, so make sure to check those programs out before prices a change again. We just released a whole batch of new lectures for the Elite Hustlers Course on building your income whether you're employed or you're self-employed and you're looking for some tax hacks, new lectures on real estate investing, new lectures on fundamental analysis Finally understanding those balance sheets cash flow statements. Those are really important in my opinion for trying to pick.

Okay, which companies do we actually think are going to succeed in 2023? Is it potentially those that had a hard time in 2022? Or some of those gonna stay low while some of them start rising? And what's the metric? That could be the difference there? Learn about all of that in my programs linked down below. There are bundle options available and if you'd like to email us for a custom bundle, send an email to Kevin Meet Kevin.com We'll get you taken care of. And if you look at the S P 500 right now, the S P 500 is trading for 17 times. EPS Now the problem with that is we we are seeing a yield right now on the 10-year treasury of 3.55 that gives us an equity risk premium of just 233.

Basically, what they're saying is the cash return that you could expect on the S P 500 is only 2.3 percent higher than the 10-year treasury right now. And Morgan Stanley is arguing why When you're walking into a recession where recessions usually bring unforeseen shocks and events, why would you invest in stocks for 233 basis points? If you're if you could be getting a risk-free 3.55 on treasuries So long and short of it, they're like, um, a lot of companies are going to face some serious earnings downside and it's going to be a problem. They also don't see the 10-year treasure yields Falling by more than 75 to 100 basis points. Now this I think is fascinating because that means if treasury yields stay somewhere around.

uh, let's see right now, they're about 2.7 Let's say treasury yield end up falling to somewhere around 2.75 to 3.. you actually are still in a dangerous environment for real estate and real estate ownership, and they think it's unlikely that treasury yields are going to fall by more than that until this entire situation is done. And the FEDS really cut rates a lot because once the FED Cuts writes a lot, treasuries tend to follow down because uh, people start buying those increasing the price for those, as that high interest rate looks like, oh, this isn't going to last forever and then as the price of bonds goes up, the yields come down anyway. Morgan Stanley goes on to say that EPS forecast will likely be lower if uh, and price stock prices could go down 22 23-ish percent to the lows if we do go into even a mild recession.

So in other words, they think what actually aligns with just a mild recession is the S P 500 at 3 000. this is pretty bearish Outlook because that's not even the hard landing potential scenario here, right? And this is despite the fact that they actually believe the FED is going to come in and have to cut rates, they still think even in the face of cutting rates, we're going to be hitting some pain and investor expectations for earnings according to Morgan Stanley remain too high based on our forecasts and conversations with Uh clients. Now, Obviously, what's driving a lot of the excitement right now is this idea that inflation is falling and probably plummeting And that is true. We are seeing that.

However, Morgan Stanley also makes this argument that one of the problems is when you see a prices come down inflate like disinflation occurs, right? You end up getting negative operating leverage because you don't have that room to raise prices anymore. This is just a fancy way of saying margin is going to get squeezed, so prices come down down. you get less earnings growth with the same amount of people you have. Then you start firing people and trying to be more efficient, but you're still not getting to the margin that you used to have during the inflationary period where it was easier to sort of raise prices up front and then kind of grow into those higher prices as you actually started getting affected by higher inflation that add net margins they believe are going to be the big reason We actually see a big downside in the S P 500 and so they chart this for us.

They say here is a chart of the contribution to the S P 500's trailing EPS Growth trailing is going to generally be looking at last 12 months right? and what you can see here is that the yellow is net margin and uh, the blue is sales per year and in recessions like over here 2002-ish You saw this 2009, 2010 ish you saw this and then over here in the covet pandemic you you saw this this sort of negative movement down. the the biggest reason you actually saw the stock market Fall was in their opinion, earnings per share year over year plummeting. and look at the trajectory you're on right now. We still haven't even broken that zero percent level in aggregate year over year.

So they believe that year-over-year earnings per share are going to go negative for a lot of companies and it's going to drag the S P 500 down. And this is where and I've mentioned this as well I Think it makes sense to look at companies that are hopefully going to have positive or very large earnings per share reads going into 2023 compared to 2022. Now that could be challenging right? You could look at a company like uh N Phase or Tesla or Solar Edge and you could hope that hey, these companies are all going to have especially end phase and Tesla that they're going to have positive EPS because they're smaller right? they're still in that early growth phase where even if there their growth Falls it's still positive right? But is that going to hurt Their PEG ratio end phase is a little expensive right now, even though the price has been coming down. it's a little pricey right now.

When you look at it on a PEG ratio basis, then you look at companies like Generac which is a little bit more of a legacy player or for example, the chip manufacturers and then you wonder, have they actually hit bottom yet on those EPS revisions, you look at what Samsung just reported and maybe the answer to that is yes, Samsung just reported a decline of 69 percent and basically in Revenue year over year a 69 drop. Huge, tremendously huge drop. What happened? The stock actually went up as markets basically saw as saw the Samsung's decline is now. we already know that the chip Market has been hit.

So a lot of people look at chips Nvidia AMD Taiwan semiconductors and say no, no, no, they've already bottomed out in the stock cycle because Traders hedge funds and institutions have taken their money and they've run into defensives and staple stocks. Costco John Deere Lockheed Martin Whatever. they've run into those stocks and they already sold the chips. So we already have the baked in EPS recession.

but the S P 500 in aggregate does not. And so this actually sets up this really weird situation where a lot of folks are starting to warn that it's actually not going to be individual stocks that get reamed in 2023. It's the indices that get reamed in 2023. that could be remarkable.

Imagine chip stocks, growth stocks, and Tesla end the year positive 10, 20, 30 percent. whatever. and the indices actually end up underperforming with maybe a negative five negative 10, negative 20. Now, who knows? that's just speculation, but this is what Morgan Stanley is arguing.

Now when we continue this, we start talking a little bit about inflation and they actually suggest. and this is a really fascinating piece by. Morgan Stanley They actually go as far as say that inflation is likely to come down faster than most are expecting, including the Federal Reserve. That's good news on the surface.

However, the issue for Equity investors is that a fallen CPI is lagged, meaning the FED will likely be unable or unwilling to cut rates anytime soon. That's right. I Personally think we're looking at the end of the year when it's already going to be too late, right? They're going to be stone-faced until it's too late. In other words, falling inflation is going to be a significant headwind for profit margin, giving the sequence of costs falling later than end price.

In other words, you reduce the price first and then you get destroyed in margin at your companies. and then the disinflation starts hitting your costs and your margin actually starts rebounding. Big risk, right? This is something we were talking about just the other day. You look at Tesla for example, they cut prices of some of their Chinese Vehicles 23 percent.

The Bloomberg commodity index for the year of 2022 was down like 23. so you kind of have an alignment there. even though the Bloomberg commodity index does not include labor costs right which we know those have been stable or up. Uh, And and the costs that go into a Tesla are not just material costs, they're labor costs.

Let's just even assume it's 50 50. right? That means you could potentially only see an 11 or 12 percent impact from Commodities or support from Commodities. But if that even takes longer to start getting priced in into actual margins because you have contracts that take six months to roll over whoof, you can have some painful and squeeze is on margin, but then you wonder how much has that already been priced in? Because of the trend change of a lot of Institutions and Traders running from growth, it's everything but growth right now is what's sexy, right? Anyway, continuing on, they say here that it is actually really important to make sure that you don't look at the bad reports as good see they say. We caution against interpreting the status ISM prints as good in the context of uh, bad news is good news.

They actually say we're approaching the point where bad is bad for the indices, bad is bad for the indices. Now that's actually a fascinating argument, because well, it's something that we thought of at the beginning of 2022, where we said, look, good news is bad news, bad news is bad news. Everything's just bad at the beginning of 2022. And this is this was my inspiration for selling in January of 2022.

now I didn't move my portfolio perfectly the way I should have after that. but the signals were there and the same signals I'm seeing now, uh, in some cases concerning, but in many cases in reverse And so I'm trying my best to pay attention to all these signals and just deliver that value to you for free here on YouTube Of course, if you want to join me in course member live streams you can do that via the link down below. Learn everything I Know about fundamental analysis, trying to look past the noise of the day-to-day fluctuations of the market, understand how to long-term build wealth in real estate or stocks. Okay, let's keep going here.

So the next page that I'm going to bring us to, we're going to skip ahead just a tiny little bit here. Margins and focus at companies struggle to convert Top Line growth into bottom line results that's called negative operating leverage and cost cutting measures such as layoffs are becoming more common at the sector level. Energy and Industrials have the highest growth expectations, while materials and Communication services are expecting double-digit declines. Now here's what they think in terms of sectors.

They actually think that Discretionaries and Communication Services could end up being the leaders in 2023 for EPS growth. Now, they're not the biggest fans personally of investing in those right now. They actually have the following expectation for what their recommendations are. They still put discretionary at today, at least as underweight, calm Services as neutral.

That's even as they expect those to end up showing the most EPS Growth in 2023. The big thing that concerns them is the market is pricing in stable margins. Margins are in focus and the market is projecting stable Top Line margins. And if we look at that, we can actually see that right here there we go.

But what concerns them is the fact that the market is pricing stable margins. and so that's where they think the big hit ends up Coming across the board for the indices is who's going to get whacked with margins The Biggest Loser they think is going to be energy. but we'll see what happens from there. I Think my sort of take away from this report is the following: Morgan Stanley is probably right that we are going to end up seeing a Fed U-turn and cuts, but it'll be too late, right? this will.

We will already be in the recession. We will be in recession. When those cuts come, the market will try to pre-price that, but there was a risk that in between now and that pre-pricing we end up getting a collapse of earnings, especially at companies that ran in 2022. That's my belief and it's something that you see with Morgan Stanley as well because they're telling you hey, look S P 500 companies are being priced at 17.6 times earnings and we think there's going to be a an in aggregate downgrade in earnings that only individual companies with actual EPs and margin stability those are going to be the ones that perform.

But but most everything else that did pretty decently in 2022. Heads up some risk factors here and that Fed cut is going to come too late to really help and that creates some potential hardship still ahead of us. That means stay out of margin, stay stay as as uh, you know, limit your exposure. It doesn't necessarily mean paper hand Panic Oh my gosh, 50 to 70 coming again.

In fact, some or many stocks like what we saw with the chips could be nearing their bottom already, But in aggregate, the indices could get hurt as we definitely start expecting to see margin collapse which isn't pricing it isn't priced in. so margin collapse not priced in. That's a big problem because then you get that negative operating leverage which they're talking about. And that's really when you start entering the painful recession and the data they're seeing pretty much affirms a recession.

Now it's just a matter of hey, how hard does the FED want it to be? Hopefully inflation continues to plummet, which they also see happening, which is optimistic. but again, the Fed's not going to flip-flop until we're probably already in recession. And that's the painful part is they will realize that this inflation ended up being transitory their first thesis way too late. just like they were too late the first time around.

and they were still printing money in March of 2022. It doesn't make freaking sense. Anyway, in my opinion, my, my sort of look at this is you've got yourself a red flag for the indices for 2023. Uh, especially if you're sort of broad-based investing into a lot of companies that aren't prepared for that margin collapse or don't have any kind of, you know, price drops already priced in Again, you saw what happened with Samsung.

They're down substantially, had a huge Miss on revenue and margins. stock actually went up. It's because the Market's already built that into certain sectors. So that's why I Personally think sectors like Chips and Tech and Growth have most of their pain behind them.

No guarantees. knock on wood. Anyway, check out the programs linked down below. I'm building your wealth and we'll see in the next one.

Thanks Bye.