Morgan Stanley's pessimistic outlook on the S&P 500 has diverged from more optimistic forecasts provided by other financial institutions. Led by Andrew Sheets, the bank's strategists predict a significant drop of 16% in earnings per share for the S&P 500 this year, per Bloomberg, quoted on Yahoo.

This projection stands out as one of the most bearish among those tracked by Bloomberg. Moreover, data from CFTC’s Commitments of Traders report compiled by Bespoke shows S&P 500 futures are 17.4% short. That’s marked the worst reading since September 2007, as quoted on Yahoo.

In this article, we explore Morgan Stanley's reasoning behind their bearish stance and discuss their suggested investment strategy of utilizing inverse ETFs.

Downside Risks in S&P 500 and Likely EPS Disappointment

According to a note published by Morgan Stanley analysts, they believe that the downside risks to U.S. earnings are imminent. They anticipate a deteriorating liquidity backdrop, which is likely to exert downward pressure on equity valuations over the next three months. Additionally, the analysts predict further disappointment in earnings per share as revenue growth slows and margins contract.

Divergence from Median EPS Predictions

Morgan Stanley's projected earnings per share for the S&P 500 stands at $185, significantly lower than the median prediction of $206 from other strategists. This sizable difference reflects their bearish perspective on the market's performance.

Furthermore, the bank's team envisions the S&P 500 index reaching 3,900 by year-end, in contrast to June 2, 2023’s closing value of 4,282.37. Despite the recent rally and proximity to a bull market, concerns surrounding rate hikes and a potential recession are headwinds.

Alternative Perspectives

While Morgan Stanley maintains a bearish stance, it's important to consider alternative viewpoints. Some strategists, such as the team led by Julian Emanuel at Evercore ISI, have a more optimistic outlook. They recently raised their S&P 500 year-end target by 7.2% to 4,450, citing easing inflation and potential support from government stimulus measures.

Inverse ETFs to Play?

The-above-mentioned divergent opinions highlight the ongoing debate surrounding the market's future trajectory. However, still, some investors may like to follow Morgan Stanley. That cohort may go for inverse S&P 500 ETFs like Direxion Daily S&P 500 Bear 3X Shares (SPXS Quick QuoteSPXS - Free Report) , ProShares UltraPro Short S&P500 (SPXU Quick QuoteSPXU - Free Report) and ProShares UltraShort S&P500 (SDS Quick QuoteSDS - Free Report) , ProShares Short S&P500 (SH Quick QuoteSH - Free Report) and Direxion Daily S&P 500 Bear 1x Shares (SPDN Quick QuoteSPDN - Free Report) .