Morgan Stanley’s analysts, prominent bearish voices on Wall Street, believe that the chances of a rally in the S&P 500 in the last quarter have diminished “considerably.”
They point to factors such as narrowing market breadth, cautious factor leadership, declining earnings revisions, and diminishing consumer and business confidence as signs that tell a different story than the consensus, which anticipates a year-end rally driven by bearish sentiment and seasonal tendencies.
“In our view, the fundamental setup is different than normal this year, with earnings expectations too high for the fourth quarter and 2024, even in an economy that’s performing well,” the analysts wrote in a note.
Morgan Stanley maintains its long-standing year-end target for the S&P 500 at 3,900, in contrast to the median target of 4,435 among strategists tracked by Bloomberg.
S&P 500 closed at 4,117.37 on Friday.
The analysts also suggest that monetary and fiscal policies are unlikely to provide relief and may even tighten further. They believe that the strength in the headline labor data obscures the challenges faced by the average company and household.
“This is one reason why market breadth continues to exhibit notable weakness. While some may interpret this as a bullish signal – i.e., oversold conditions – we believe it’s more a reflection of our view that we are still against a late cycle backdrop where earnings remain at risk for most companies,” they added.
All-in-all, the analysts conclude by saying that “the S&P 500 price action into year-end is more likely to come down to where the average stock is trading rather than rallying to higher levels because breadth typically leads price.”