Morgan Stanley’s top equity strategist Michael Wilson has once again reiterated his bearish stance in a note sent to clients over the weekend.
Wilson, who correctly predicted that US equities will tumble in response to Fed’s hawkish actions, is now saying that stocks have much further to fall. The strategist noted that investors are now realizing that the growth is slowing down and we should thank the Q1 earnings season for that.
“First, while most companies handily beat consensus EPS forecasts, the bar had been lowered during the quarter more than usual. Second, the ratio of negative to positive earnings revisions spiked. Third, the quality of the earnings deteriorated as incremental operating margins rolled over for many companies and sectors, including many important large-cap technology stocks. Finally, 2Q estimates for the S&P 500 came down while full-year estimates were unchanged. This effectively raises the bar for the second half of the year, which is about the time the economy will be feeling the effects of higher rates and other headwinds,” Wilson told clients.
More importantly, Wilson notes that the market has positioned for the higher rates, but adds that “we’re just not there yet.” On what needs to happen so that selling is overdone, Wilson says that either valuation fall to levels (S&P 500 multiples in a range of 14-15) or earnings estimates get cut.
“With valuations now more attractive, equity markets so oversold and rates potentially stabilizing below 3%, stocks appear to have begun another material bear market rally. After that, we remain confident that lower prices are still ahead. In S&P 500 terms we think that level is close to 3,400, which is where both valuation and technical support lie,” the strategist concluded.
By Senad Karaahmetovic