Traders are being duped by Bear-Market Rally, says Morgan Stanley’s Wilson

(Bloomberg) — Morgan Stanley’s chief U.S. equity strategist isn’t convinced that the stock rally is here to stay and reinforced his warning about a possible market downturn later this year.

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“We would characterize it as a bear market continuing,” Mike Wilson told Bloomberg Surveillance on Friday. “This is how bear markets work. they are designed to trick you, to confuse you, to make you do things you don’t want to do, to chase things at the wrong time, and perhaps to sell them at the wrong time.”

The S&P 500 is up nearly 10% year-to-date, hovering near its key 4,200 level. Optimism over the US debt ceiling decision and excitement over artificial intelligence dominated this week after concerns about the gridlock and interest rates stagnated stocks for most of May.

Wilson has remained one of Wall Street’s biggest bears after accurately predicting the 2022 selloff, even as U.S. stock indexes 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 base case doesn’t support when stocks are trading today, whether at the index level or at the per-stock level, and the second half will be steeper and probably lower for the index,” Wilson said.

Detractors point to the thin guidance fueling the market advance as a signal of future weakness. In the absence of a batch of some big tech names, stocks barely budged. The equal-weight version of the S&P 500, for example, remains roughly flat despite a rise in the main, cap-weighted gauge.

While Bank of America President Savita Subramanian told Bloomberg Television this week that tight latitude is not necessarily “a precursor to doom and gloom,” Wilson points to the lack of participation as a point of skepticism.

“We think where we are, the indicator is telling you everything is rosy and good, and the breadth is telling you something else,” Wilson said on Bloomberg Television. “Growth is going to be an issue in the second half of this year, whether it’s a recession or not. We think it’s going to be an income decline that’s much worse than what people are currently modeling.”

Earlier on 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 posted $3.9 billion in outflows in the week to May 24, the third consecutive week of redemptions that put year-over-year flows into the asset class into 2023, BofA said, citing data from EPFR Global.

Some Wall Street voices, however, have tempered their gloomy outlook for U.S. stocks. Citigroup Inc.’s global asset allocation strategists upgraded U.S. stocks to neutral on Friday, citing an expected boost from artificial intelligence, the approaching peak and economic resilience. Subramanian raised his year-end target for the S&P 500 to 4,300.

Meanwhile, Andrew Slimmon, a senior portfolio manager at Morgan Stanley Investment Management, struck a markedly 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 fears of missing out could push the S&P 500 toward its 4,600-year high. that’s it.

“Except for some very persistent bears who dig in their heels, more and more people will be reluctant to raise their valuations,” Slimon said.

– With assistance from Sagarika Jaisinghani, Jonathan Ferro and Tom Keane.

(Updates with comments on market breadth).

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