(Bloomberg) – Morgan Stanley’s chief U.S. equity strategist isn’t convinced the stock market rally is here to stay and has stepped up his warning of a potential market downturn later this year.
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“We would characterize this as the bear market continues,” Mike Wilson told Bloomberg Monitoring on Friday. “That’s what bear markets do: they’re designed to trick you, confuse you, make you do things you don’t want to do, chase things at the wrong time, and probably sell them at the wrong time.”
The S&P 500 index is up nearly 10% year-to-date, near its key 4,200 level. by artificial intelligence prevailed this week after jitters over a stalemate and interest rate concerns kept stocks stagnant for much of May.
Wilson remained one of Wall Street’s biggest bears after accurately predicting the 2022 selloff, even as U.S. stock indices continue to climb this year. In his view, earnings expectations and economic uncertainties leave little reason for optimism that the positive momentum can continue.
“The fundamental case doesn’t support where stocks are trading today, either at the index level or at the single stock level, and the second half is going to be more choppy and likely down in the index,” Wilson said.
Opponents pointed to weak leadership propelling the market advance as a signal of weakness to come. Absent a batch of some large-cap tech names, stocks barely budged. The par-weight version of the S&P 500, for example, remains roughly flat despite the gain on the capitalization-weighted main gauge.
While Bank of America’s Savita Subramanian told Bloomberg Television this week that narrow-mindedness isn’t necessarily a “harbinger of doom and gloom,” Wilson cites lack of participation as a point of skepticism.
“We think where we are is that the index is telling you that everything is fine and the magnitude is telling you not,” Wilson said on Bloomberg Television. “Growth is going to be a problem in the second half of this year, whether or not it’s an economic recession. We believe this will be a much worse earnings recession than people are currently modeling.
Earlier Friday, Bank of America Corp. strategist Michael Hartnett said investors were fleeing stocks for money market funds and bonds and predicted another bout of risky trading in June. Global equities saw outflows of $3.9 billion in the week to May 24, a third straight week of buybacks that put year-to-date flows into the asset class stable for 2023, BofA said, citing data from EPFR Global.
Some Wall Street voices, however, have softened their gloomy outlook for US stocks. Global asset allocation strategists at Citigroup Inc. lifted U.S. stocks to neutral on Friday on an expected boost from artificial intelligence, the approach of peak rates and economic resilience. Subramanian raised its S&P 500 year-end target to 4,300.
Meanwhile, Morgan Stanley Investment Management’s senior portfolio manager, Andrew Slimmon, struck a significantly more optimistic tone than the bank’s view as expressed by Wilson, saying in a telephone interview that expectations of a recovery in earnings in 2024 and the fear of missing out could drive the S&P 500 towards 4,600 by the end of the year.
“With the exception of some very permanent bears digging in their heels, more and more people will reluctantly raise their estimates,” Slimmon said.
–With help from Sagarika Jaisinghani, Jonathan Ferro and Tom Keene.
(Updates with comments on market scope.)
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