Ask anybody on Wall Street last December what was next for stocks, and most would’ve told you they were going lower this year. However, Morgan Stanley’s chief US equity strategist, Mike Wilson, was one of the most adamant bears.
He said stocks had run out of steam in December, and the S&P 500 would fall to between 3,000 to 3,200.
Instead, the S&P 500 is up about 18% this year, significantly better than the annual average return of about 10% over the past 30 years. It closed at 4,554 on July 24.
Wilson apologized for his wrong-way bet in a note to Morgan Stanley clients on July 24.
“We were wrong. 2023 has been a story of higher valuations than we expected amid falling inflation and cost cutting,” Wilson wrote in the letter.
Inflation has fallen significantly in the past year. In June, CPI showed inflation grew 3% in the past year. In June 2022, it had grown 9.1%.
A steady decline in inflation, ongoing strength in the jobs market, and the potential end to additional Fed Funds rate increases sparked investors’ optimism. Investors have been forced to cover short positions and increase exposure to equities, despite risks to corporate earnings and a recession.
Wilson’s admission is somewhat surprising given he repeatedly warned this year that the stock market rally would reverse.
For example, he told Bloomberg in May, “We would characterize this as the bear market is continuing…The fundamental case does not support where stocks are trading today.”
Morgan Stanley’s Wilson Remains Bearish
The mea culpa hasn’t changed Wilson’s view, though. He remains “pessimistic on 2023 earnings.”
Wilson believes lower inflation could cause companies to lose pricing power. If so, earnings could suffer, setting stocks up for downside again.
His target for the S&P 500 is 3,900 this year and 4,200 next year.
How earnings season plays out may determine if he’s right or wrong. Second-quarter earnings are expected to fall by 7%. Analysts may cut forward earnings outlooks if they come in weaker, pressuring stocks. If not, upward revisions may fuel another rally, frustrating Wilson again.