Stocks could fall by up to 10% in the short term and the big question facing investors in 2023 is how bad earnings will be, says JPMorgan strategist

"I'm not particularly optimistic about this current rally. I don't really think it has legs," JPMorgan's Jack Manley told Bloomberg about stocks.

• Stocks look vulnerable to a short-term decline of up to 10%, a JPMorgan Asset Management strategist told Bloomberg. 
• "I'm not particularly optimistic about this current rally. I don't really think it has legs," said global market strategist Jack Manley. 
• But there's a silver lining going into 2023 - "stocks aren't expensive anymore," he said. 

Stocks could drop as much as 10% in the short-term, a top JPMorgan strategist said Monday, adding that a "silver lining" lies in valuation as investors enter the new year. 

"I could see another 5-10% lower on this equity market. I'm not particularly optimistic about this current rally. I don't really think it has legs. I don't think it has a whole lot to stand on," Jack Manley, global market strategist at JPMorgan Asset Management, said in a Bloomberg TV interview. 

The S&P 500 through Friday had gained nearly 6% since November 10 when the US October inflation report showed some cooling in consumer prices, bringing headline inflation below 8%. The report strengthened expectations for the Federal Reserve to slow down the pace of rate hikes at its December meeting. It also re-ignited speculation the Fed would start cutting rates, perhaps in 2023 as the economy moves in a widely expected recession. 

The S&P 500 has cut down its year-to-date loss but remains lower by 17%. 

The "silver lining here is that … basically, everything that's happened this year has been driven by multiple compression. So the good news going into 2023, from an equity market perspective, is that stocks aren't expensive anymore, at least not in the way that they were at the start of the year," Manley said. 

"The problem, of course, is that that earnings shoe has not really dropped yet and the big question right now is just how bad our earnings going to be as we move through 2023."

Investors generally are not expecting good news from the perspective of corporate earnings. "It's really just a question of how bad" they will be, he said. 

For the fourth quarter of 2022, analysts cut per-share earning estimates for S&P 500 companies by 3.3% in aggregate during October, according to FactSet. That figure is above the five-year average of negative 1.4% for the first month of a quarter. 

For the third quarter, 69% of S&P 500 companies have posted positive per-share earnings surprises, running lower than the five-year average of 77%, according to FactSet. 

The story for stocks could get more upbeat over a longer time horizon. 

"2023 may not be a great year for earnings but 2024 probably we will be a pretty decent one," Manley said. "And if we can get over this trouble, if the recession that is coming ends up being shorter or at least shallow in nature, I think we can look beyond the short-term chop and focus in on that longer-term story."