(The Bharat Express) - The worst is yet to come, a leading Wall Street strategist warned, as investors eye their outlook after a lackluster end to February trading.
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All three major US equity benchmarks lost last month as the Dow Jones fell to its lowest level for the year so far, but Morgan Stanley’s top US equity strategist, Mike Wilson, says the S&P 500 will be the next index to collapse.
Speaking Bloomberg the Openthe loyal bear – voted the No. 1 stock strategist in an October survey by Institutional investor– said he expects earnings to continue falling, which in turn could cause the stock market to fall between 5% and 20% from its current level of nearly 4,000: “Our work suggests it’s closer to 20 from here % will drop, so, low three thousand.”
Reasoning his pessimistic view, he explained, “We don’t have a crystal ball, of course, but what we can say with confidence is that the equity risk premium and multiples don’t reflect the earnings risk that we see.”
Wilson says this is happening for two reasons: First, investors have become more optimistic about the economy. “Three months ago, most institutional clients thought a recession was very likely; now they think it’s not so likely,” he said. “So that’s a big sea change.”
He says the second reason is the high level of liquidity in the markets: “Global money growth has more than offset what the Fed was trying to do with tightening financial conditions and has created an exuberant environment for asset prices. is not tenable in our view.”
Bottom of October?
As forecasters continue to push their recession forecasts toward the end of the year, some investors see October as the month when markets could finally bottom out. Wilson himself didn’t name an exact month, but he sees the market continuing its downward movement: “We just don’t think the bear market is over because the earnings recession is far from over.”
As for the downward earnings trend, Wilson added that the market was supported by economic data that was “slightly better than expected,” leading investors to believe the earnings declines were over. He countered, “Some people think the worst is behind us; we think the worst is probably ahead of most companies.”
This isn’t Wilson’s gloomiest outlook, even in recent weeks. In a Feb. 20 memo, he wrote that investors were in the “death zone,” having “followed stock prices to dizzying heights once again, as liquidity (bottled oxygen) allows them to climb into a region they know that they should not go. and cannot live long.”
He added that investors – largely in the S&P 500 market – are climbing into “the pursuit of the ultimate topping out of greed” with the expectation that they will be able to bounce back without “catastrophic consequences.” However, he added: “Oxygen eventually runs out and those who ignore the risks get hurt.”
Waiting for the ‘pain point’
Wilson’s call came as Bank of America warned that the Fed will be willing to keep raising rates until the “consumer pain point” is found to bring inflation under control.
In a memo seen by Fortunewrote economist Aditya Bhave: “At this stage, rate hikes of 25 bps in March and May appear very likely. We recently revised our Fed forecast to include an additional 25 bps hike in June. But the resilience of the demand-driven inflation means the Fed has to raise interest rates closer to 6% to get inflation back on target.”
This story was originally on Fortune.com
