The expert warns that markets have not yet priced in recession and falling earnings.

Market players have been anticipating the Fed's decision to let up on the gas pedal and declare the most aggressive tightening cycle since the 1980s to be over for most of the year.

Recent declines in inflation rates, according to Morgan Stanley, gave investors faith that the world's most powerful central bank was about to shift course. As a result, the S&P 500 rose more than 14% in only two months.

However, market participants' attention is now probably going to be diverted from interest rates and the Fed's monetary policies.

The focus will instead gradually shift to the consumer going forward, who could experience more pressure in the upcoming year, mostly as a result of the Fed's aggressive tightening, the U.S. bank cautioned in a note released on Monday.

According to Lisa Shalett, a chief investment officer of wealth management at Morgan Stanley, "the U.S. economy is likely to start feeling the effects of this year's policy tightening in earnest in 2023 since the economic effects of changes in monetary policy tend to lag by about six to twelve months."

Morgan Stanley anticipates subpar GDP growth for 2023. Sales volumes, pricing power, and company profitability will all suffer as a result, the expert predicted. However, Shalett cautions, "current earnings estimates and stock values don't seem to reflect this perspective."

She counsels investors to concentrate more on consumers going forward rather than the direction of the Fed's interest rates. Interest rates are anticipated to reach their peak next July at 5.0% to 5.25%, according to current market projections.

The consumer economy dominates the American economy. Two-thirds of American economic activity is attributed to spending, which, according to Shalett, "will certainly determine the time and extent of the economic recession."

The New York Fed's model predicts a 38% chance that the American economy will experience a recession in November 2023. The chance is probably closer to 100% once the model suggests a number above 30% due to its historical accuracy.

Consumer spending in the United States is "expected to impact the timing of actual interest-rate reduction, which historically have been a more reliable sign of the end of a bear market," according to Shalett.

However, according to the expert, present consumer spending is pretty strong, as shown by statistics on the unemployment rate, salary growth, personal expenses, and retail sales. But she added that there are already warning signals that consumer spending is declining.

For example, the personal savings rate, which government checks had mostly boosted during the Corona era, "has plunged from a peak of 33.8% in April 2020 to 2.3% in October 2022—the lowest it's been since 2005."

Shalett claims that the amount of debt on revolving credit cards has reached a record high and that fewer new positions are being offered.

Regarding the stock market, she asserts that present equity prices and profit estimates do not yet reflect a slowdown in growth.

(Sources; investing.com, reuters.com)