Morgan Stanley warns of a 16% drop in profit for S&P 500 companies this year, followed by a sharp rebound in 2024 when analysts say the Federal Reserve's policy will become more accommodative.

Strategists led by Michael Wilson said in a note on Monday that they expect earnings to rebound sharply, with a 23% jump next year.

The Wall Street bank warned that the EPS of S&P companies could slip to $185 from $195 in 2023 before recovering to $239 next year.

"The boom/bust period that began in 2020 is currently in the bust part of the earnings cycle — a dynamic that's not yet priced," Wilson said.

Morgan Stanley predicted the index to rebound to 4,200 levels in 2024 while keeping its 2023-end target unchanged at 3,900. The index closed at 4,282.37 on Friday.

A slew of positive news, with expectations of a Fed pivot, persistent improvement in liquidity, and AI-related tailwinds to mega-cap names such as Nvidia Corp, have buoyed indexes so far, Morgan Stanley said. Such factors have held back a correction in markets, the bank added.

(Reporting by Roshan Abraham in Bengaluru; Editing by Dhanya Ann Thoppil)