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A trader watches the screen at his terminal on the floor of the New York Stock Exchange in New York October 15, 2014.
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  • Morgan Stanley's Mike Wilson said the S&P 500 could drop over 10% before the end of the year.
  • The chief equity strategist sees lower than consensus earnings next year, risks of corporate tax increases, and a Fed taper weighing on the benchmark's returns.
  • Morgan Stanley has a year-end price target of 4000 for the S&P 500, a 10% drop from current levels.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Morgan Stanley's chief US equity strategist doesn't see much upside left for the S&P 500 for the remainder of 2021.

The firm's year-end price target for the benchmark index is 4000, a roughly 10% drop from current levels. Additionally, between now and the end of the year, Morgan Stanley expects a correction of even greater than 10%.

"The combination of lower than consensus earnings next year and lower valuation leads us to believe there is very little upside, if any, to major U.S. equity indices over the next few quarters," said Mike Wilson, who is also the firm's chief investment strategist, in a Monday podcast episode.

The second quarter corporate earnings season was incredibly strong and propelled the firm to raise its 2021 earnings forecast for the S&P 500 to $205 per share. As a result, Wilson is less bullish on earnings growth for 2022 as he anticipates a payback in demand and profitability.

Wilson also expects the corporate tax rate to increase after Washington passes the infrastructure bill. Additionally, the Federal Reserve is likely reduce the size of its asset purchase program, which could weigh on stock valuations, Wilson said.

These negative factors could leave the S&P 500 vulnerable to a correction in the short term, added the strategist.

On the positive side, the correction would allow for the next leg of the economic expansion and bull market to commence, Wilson said. But until then, investors should favor defensive stocks in sectors including health care, consumer staples, and utilities, he said.

Financial stocks could also help position portfolios in periods of higher inflation and interest rates as the Fed begins to taper, he added.

Read the original article on Business Insider

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