Morgan Stanley's 'Extreme Bear Case Scenario' Is Both Horrifying And Realistic

Adam Parker, Morgan Stanley’s Chief U.S. Equity Strategist, has maintained a year-end price target of 1,167 for the S&P 500 all year.  And he has been getting a lot of criticism for his bearish call.

But he’s sticking to it.

One reason is because he considers his base-case earnings outlook to be relatively optimistic. “In fact, it really doesn’t take into account the Fiscal Cliff in any way, meaning downside to our base case is likely,” he writes.

In a new note to clients, he visits “extreme bear case scenarios” for S&P 500 earnings in 2013.  It considers a worst-case fiscal cliff scenario, which would cut 5 percentage points from GDP, and the earnings collapses experienced in the last three recessions.

From Parker’s note:

If the worst-case fiscal cliff scenario were to play out and the US economy were to fall into recession, we would expect 2013 EPS to decline sharply. Using 2012 consensus estimates and applying the earnings declines from previous recessions, we would find potential for earnings below even our bear case estimate of $81 (Exhibit 7).

adam parker extreme bear case scenario

Photo: Morgan Stanley

$56 to $72 in 2013 EPS represents a 28-44 per cent collapse from the $100 he expects for 2012.  In these scenarios, the S&P 500 would likely go below 1,000.

bear case

Photo: Morgan Stanley

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