Morgan Stanley’s Mike Wilson alerted just over two weeks ago that a 20% drop in US stocks was a realistic prospect. Since then, the S&P 500 has remained near all-time highs despite bouts of volatility.
Skeptics like Wilson can now find a more sympathetic audience as the bond selloff accelerates and stocks drop in Wednesday trading on a global supply-side conflict.
All of this strengthens the strategist’s belief that profits season will do little to calm commodity-fueled wage growth fears, just as pent-up consumer usage fades.
“We’re in the final stages of this mid-cycle transformation, where growth has slowed and markets are correcting,” he said over the phone.
While the S&P 500’s multiple already has fallen to 20 times income for the coming year, the observer expects it to fall to 18 in the near future. When you merge that with the possibility of business profits falling from here, it’s hard to rationalize stock values at near-record highs.
“We’ve been seeking for a 10-20% adjustment led by technology stocks,” Wilson said. “We believe earnings forecasts are exaggerated.”
US stock dropped early Wednesday, and European benchmarks fell as much as 2%, as the Treasury price decline continued for the third day. The S&P has disobeyed numerous warnings to more than double from its Covid groove, but investors are now confronted with high inflation conditions invisible in the previous year, as the Federal Reserve prepares to trim stimulus.
All the while, one user price index is rising at the fastest rate in 3 decades, sending benchmark Treasury yields to three-month peaks. This is bad news for stock indices such as the S&P 500 and the Nasdaq100, which are weighted heavily toward Big Tech stocks. Over the last decade, these long-term assets have rallied with bonds to noble market values.
At the same period, retail investors are becoming less active as dip buyers, with S&P 500 support levels giving way to the aftereffects of the China Evergrande crisis.
“The retail community has been incredibly robust, but if a dip does not succeed, they will not purchase the following dip.” That’s what happened a few weeks ago when the S&P fell below its 50-day moving average,” Wilson explained.
Stock volatility is poised to resurface, according to Barclays Plc analysts led by Emmanuel Cau, while they remain upbeat on the asset class due to the potential for earnings to balance rising inflation. Value stocks are cheap, often cyclical companies like banks and energy producers that rise in tandem with bond yields, according to the experts.
“As policymakers dismantle reflationary policies, growth and liquidity circumstances are unlikely to improve, and macro volatility is likely to worsen,” the analysts wrote in a report released on Wednesday. “However, we expect that final demand will remain stable because both corporations and consumers are in a good position.”
Morgan Stanley’s Stock Is Down!
Morgan Stanley MS, -0.10 percent fell 0.10 percent to $99.10 on Wednesday, despite the stock market’s overall good performance, with the S&P 500 Index SPX, +0.41 percent climbing 0.41 percent to 4,363.55 and the Dow Jones Industrial Average DJIA, +0.30 percent rising 0.30 percent to 34,416.99. Morgan Stanley ended the day $6.85 behind its 52-week high ($105.95), which it had set on September 28th.