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Stocks are bound to fall further, predicted Mike Wilson, top stock strategist at Morgan Stanley.
This is because the economy is either headed for a recession or the Fed will keep interest rates high.
Wilson said both factors will weigh on corporate earnings, which are likely to come in lower than anticipated.
According to Mike Wilson, top stock strategist at Morgan Stanley, stocks are set to decline further as investors realize that the economy is either headed for a recession or that the Federal Reserve is prepared to keep interest rates longer.
In a podcast on Monday, Wilson pointed to recent upbeat sentiment in the stock market, likely because investors are anticipating an interest rate cut by the Fed later this year, all the while raising expectations of further economic growth. maintain. But both of those are less likely, he said, and that spells trouble for corporate earnings and, in turn, the stock market.
“We believe the equity market is hoping for the best of both worlds: interest rate cuts and sustainable growth,” Wilson said. “Instead, we believe another chapter of our fire-and-ice story is possible: in other words, a tighter Fed even as growth slows toward recession. It would be a difficult environment for stocks,” he added. Warned.
Wilson has previously warned that stocks face a “fire and ice” scenario, in which high inflation and the prospect of a recession will weigh on corporate earnings. Although investors have been encouraged by surprisingly strong earnings last quarter, a continuation of the trend is not supported by the economic data, Wilson said.
“If one believes our leading indicators that point to earnings-per-share astonishing margin declines in the coming months, the stock will likely follow that negative path,” he said.
Wilson predicted that the worst earnings slump since 2008 could hit the market this year, which could take shares down 26%.
This comes after an already difficult year for equities, with the S&P 500 poised to decline 20% in 2022 as the Fed aggressively raised interest rates to tame inflation. Experts say higher rates substantially increase the odds of a recession, and they also take a heavy toll on corporate profits by raising the cost of borrowing.
The Fed raised interest rates by 25 basis points last week, taking the fed funds rate target to 5-5.25%. Investors are pricing in a 33% chance the Fed could cut rates by July, according to the CME Fedwatch tool, though that possibility has been dismissed by other Wall Street strategists, who say the Fed will pause and Will keep rates high again.
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