Morgan Stanley’s Mike Wilson sees a rebound in earnings in the latter half of 2024 but for now his message to investors — stick to the stock picker’s playbook as things are going to get worse before they get better.
(Bloomberg) — Morgan Stanley’s Mike Wilson sees a rebound in earnings in the latter half of 2024 but for now his message to investors — stick to the stock picker’s playbook as things are going to get worse before they get better.
The downward slide in US equities after the market peaked in July is set to continue with the catalysts for more declines already in place, according to the prominent equity bear who was ranked No. 1 in last year’s Institutional Investor survey after correctly predicting the 2022 stocks selloff. His year-end target for the S&P 500 Index implies about a 10% drop from the current level.
“There’s going to be this sort of boom-bust-boom which is in process now,” Wilson said in a phone interview. He expects earnings to remain under pressure over the next six to nine months as the US economy slows down. His EPS target for this year of $185 is the lowest on Wall Street, while his EPS forecast for 2024, $228, predicts a 23% rebound.
The recent move lower in stocks was driven by the repricing of a term premium on US Treasuries, according to Wilson. The surge in bond yields is weighing on valuations for equities and he expects it to persist.
“Even if you assume there’s no recession, which is our base case, earnings do not support a 4,200 to 4,300 level for the S&P 500,” he said.
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The latest US consumer-price index report showed the stickiness of US inflation and to Wilson the numbers fit the narrative that the Federal Reserve will keep higher rates for longer. Fiscal policy remains one of the biggest risks for stocks: “As Democrats and Republicans can’t agree on how much money to appropriate, it can be a real drag on economic growth for next year.”
And a potential spike in oil prices as a result of Israel-Hamas war remains a wild card. “The market interpretation is that it’s an isolated conflict, not a broader regional conflict for now,” he said. “But if oil prices start to really shoot up as a result of this, then I will become more worried about equity margins.”
With the idea that the Fed was going to cut its benchmark rate now being thrown out the window the market is getting back to reality, namely that — recession or no recession — equities are overvalued at the index level, Wilson said. The average stock peaked in early February but even as some stocks cheapened, their fundamentals remain unattractive. His team is trying to find stocks that already priced at the worst, but where the fundamentals aren’t going to deteriorate.
If the Fed starts cutting interest rates next year sectors like commodities, materials and energy should rebound. He expects “another pretty big bull market” in small- and midcap stocks next year. While technology or growth stocks in general usually do well in an upcycle, he sees the next ascent to be more idiosyncratic.
–With assistance from Elena Popina, Alexandra Semenova, Jessica Menton and Lu Wang.
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