Market rally or "speculative frenzy"? Why Morgan Stanley says 'refund' is coming, S&P 500 could crash to 3,000
Michael Wilson, an analyst at Morgan Stanley MS, sees the risk-reward opportunity in markets at current levels as strongly to the downside, and he's telling investors to get on board. shelter before the market is bombarded with disappointment.
What you need to know: In a new note to clients on Tuesday morning, Wilson issued a stark warning about the challenges facing US equities and the likely outcome of what lies ahead .
"The risk-reward ratio for equities is extremely low, especially with a Fed that is likely far from done and earnings expectations that are 10-20% too high. It's time to get back to base camp," the Morgan Stanley analyst said.
While the recent data has kept a potential soft landing for the economy on the table, Wilson believes it has also removed a potential Fed pause or pivot from the realm of possibilities.
After two consecutive downgrades by the central bank, the Fed is virtually certain to continue raising rates at its next meeting in March.
"As a result, rates are higher across the curve, leaving stocks more expensive than at any time since 2007," Wilson said.
In addition to Wilson's bearish take, the Morgan Stanley analyst believes earnings expectations are high. A 10% to 20% overshoot from analysts caused huge disappointment in the market.
In addition, institutional and retail investors are more optimistic than they have been in more than a year, Wilson said, adding that retail investors are almost as optimistic as they were when the SPDR S&P 500 SPY peaked in January 2022.
"We also find it strange that there is so much excitement about the rally year-to-date when in reality the S&P 500 has been flat for the past 11 weeks and at the same level," the analyst said.
On Tuesday morning on CNBC's "Squawk Box," Wilson called the rally a "speculative frenzy," noting that it's largely based on hope for a break or a Fed pivot that isn't coming anytime soon.
See also: Nervous consumers make for nervous market as Walmart and Home Depot share disappointing outlook
"The Fed doesn't want to give inflation a chance to come back up, so we think there are at least two more hikes, maybe three, in June. That's been embedded in the bond market over the past 30 days, but stocks seem to have ignored it,” he said.
The odds of a 0.5% hike continue to rise, recently reaching 24% at the Fed's March meeting, according to data from the CME Group. On the other hand, if the Fed opts for a 0.25% hike at its next meeting, the bond market currently expects a 73.8% chance of a subsequent 0.25% hike in May and 57.2% of chances of another 0.25% rise in June.
Wilson told CNBC he expects the S&P 500 to fall between 3,000 and 3,300 over the next three to six months.
"We've outrun the upside in both earnings and valuation, so it's just a bit of a throwback to a cycle that went way beyond what he should have," the Morgan Stanley analyst said.< /p>
SPY Price Action: SPY plunges in wake of Wilson comments. It was last down 1.92% at $399.43, according to Benzinga Pro.
Photo: Unsplash
© 2023 Benzinga.com. Benzinga does not provide investment advice. A...
Michael Wilson, an analyst at Morgan Stanley MS, sees the risk-reward opportunity in markets at current levels as strongly to the downside, and he's telling investors to get on board. shelter before the market is bombarded with disappointment.
What you need to know: In a new note to clients on Tuesday morning, Wilson issued a stark warning about the challenges facing US equities and the likely outcome of what lies ahead .
"The risk-reward ratio for equities is extremely low, especially with a Fed that is likely far from done and earnings expectations that are 10-20% too high. It's time to get back to base camp," the Morgan Stanley analyst said.
While the recent data has kept a potential soft landing for the economy on the table, Wilson believes it has also removed a potential Fed pause or pivot from the realm of possibilities.
After two consecutive downgrades by the central bank, the Fed is virtually certain to continue raising rates at its next meeting in March.
"As a result, rates are higher across the curve, leaving stocks more expensive than at any time since 2007," Wilson said.
In addition to Wilson's bearish take, the Morgan Stanley analyst believes earnings expectations are high. A 10% to 20% overshoot from analysts caused huge disappointment in the market.
In addition, institutional and retail investors are more optimistic than they have been in more than a year, Wilson said, adding that retail investors are almost as optimistic as they were when the SPDR S&P 500 SPY peaked in January 2022.
"We also find it strange that there is so much excitement about the rally year-to-date when in reality the S&P 500 has been flat for the past 11 weeks and at the same level," the analyst said.
On Tuesday morning on CNBC's "Squawk Box," Wilson called the rally a "speculative frenzy," noting that it's largely based on hope for a break or a Fed pivot that isn't coming anytime soon.
See also: Nervous consumers make for nervous market as Walmart and Home Depot share disappointing outlook
"The Fed doesn't want to give inflation a chance to come back up, so we think there are at least two more hikes, maybe three, in June. That's been embedded in the bond market over the past 30 days, but stocks seem to have ignored it,” he said.
The odds of a 0.5% hike continue to rise, recently reaching 24% at the Fed's March meeting, according to data from the CME Group. On the other hand, if the Fed opts for a 0.25% hike at its next meeting, the bond market currently expects a 73.8% chance of a subsequent 0.25% hike in May and 57.2% of chances of another 0.25% rise in June.
Wilson told CNBC he expects the S&P 500 to fall between 3,000 and 3,300 over the next three to six months.
"We've outrun the upside in both earnings and valuation, so it's just a bit of a throwback to a cycle that went way beyond what he should have," the Morgan Stanley analyst said.< /p>
SPY Price Action: SPY plunges in wake of Wilson comments. It was last down 1.92% at $399.43, according to Benzinga Pro.
Photo: Unsplash
© 2023 Benzinga.com. Benzinga does not provide investment advice. A...
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