US Stocks: Beware of the “Death Zone” in 2023

Investors have been warned that US stocks could experience a significant selloff in the first half of 2023, with the S&P 500 potentially falling as much as 26%. Morgan Stanley strategists led by Michael Wilson are predicting a bear market bottom this spring, and a recovery in the second half of the year, but with the S&P 500 only ending the year with negligible gains – 3,900 points, versus a December 2022 close of 3,839.

The sharp rally this year has left US equities the most expensive since 2007 by the measure of equity risk premium, which has entered a level known as the “death zone”, according to Wilson.[0] With the possibility of a Federal Reserve pivot now off the table, Wilson sees a bear case of the S&P 500 falling to 3,500, which is around the same level the stock market bottomed at in October and represents 15% downside from current levels.[1]

JPMorgan Chase & Co. strategist Marko Kolanovic also said he is “turning more defensive”, recommending that investors fade this year’s stock rally as “a recession is currently not priced into equity markets”.[2] Kolanovic noted that equities have reached near last summer’s highs and at above-average multiples, despite weakening earnings and the recent sharp move higher in interest rates.[2]

The strategists noted that the price is far removed from reality during the current bear market.[3] Wilson warned that investors may be in the so-called “death zone”, where “one starts to see and believe in things that don’t exist”. He likened it to high-altitude mountaineering, where many fatalities occur due to “wrong decisions made under stress or physical weakening that lead to accidents”.[4]

Ultimately, Wilson warned that “the bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn’t coming”.[5] He cautioned that investors may be ignoring the risks and following stock prices to dizzying heights, but that “the oxygen eventually runs out and those who ignore the risks get hurt”.

0. “Morgan Stanley Says S&P 500 Could Drop 26% in Months” Yahoo! Voices, 21 Feb. 2023,

1. “Stock Market Just Made The ‘Same Mistake Again’—Here’s Why Experts Are Worried About The Latest Rally” Forbes, 13 Feb. 2023,

2. “JPMorgan’s Kolanovic Urges Investors to Ditch Stocks for Bonds” Yahoo! Voices, 13 Feb. 2023,

3. “Morgan Stanley Strategists Say Stocks Ignore Fed, Earnings Reality By Bloomberg”, 13 Feb. 2023,

4. “Stock market has reached the point of ‘speculative frenzy’ – Morgan Stanley’s Wilson” Seeking Alpha, 21 Feb. 2023,

5. “Bear market rally ‘based on a Fed pause/pivot that isn’t coming’: Morgan Stanley strategist” The Globe and Mail, 21 Feb. 2023,