The stock market has been on a rally so far in the start of 2023, with the S&P up about 4% on Wednesday and the Nasdaq Composite up about 9%.[0] Investors have been hoping the Federal Reserve will pause its interest-rate hikes, but Morgan Stanley chief equity strategist Mike Wilson isn’t buying it.[1]
In a note to clients about the “surprisingly good start” for stocks this year, Wilson warned investors not to invest in this month’s stock rally as downbeat earnings are ahead. He said the rally is likely to fade based on month-end rebalancing and the upcoming Federal Open Market Committee (FOMC) meeting, whose 12 members determine monetary policy.[2]
Wilson believes the rally is “just another bear-market trap” and “all the good news is now priced”, and he’s leaning more toward his bear case of $180 based on the margin degradation.[3] He’s also concerned about businesses’ inability to balance out costs and revenue, and a so-called negative operating leverage cycle, where companies’ costs appear to be rising faster than sales.
Wilson said investors should remember the cardinal rule of “Don’t Fight the Fed”, as the FOMC meeting, which concludes on Wednesday, will serve as a reminder.[3] He believes markets are underestimating businesses’ inability to balance out costs and revenue, and he warned investors against buying the rally as downbeat earnings are ahead.
Even as signs of a slowdown mount, Morgan Stanley economists are sticking by their call for a “softish” landing in the US, and reckon even if there is a recession it will be milder than most.[4] Investors should take caution, as Wilson believes the market is in worse shape now as sticky inflation is eating into company profits.[5]
0. “Sell the Rally, Says Morgan Stanley. Markets Are Fighting the Fed.” Barron’s, 30 Jan. 2023, https://www.barrons.com/articles/market-rally-sell-federal-reserve-51675103902
1. “‘Imminent’ earnings recession could tank US stocks, Morgan Stanley warns” Fox Business, 25 Jan. 2023, https://www.foxbusiness.com/markets/imminent-earnings-recession-could-tank-us-stocks-morgan-stanley-warns
2. “Top Strategists At Morgan Stanley And JP Morgan Are Skeptical Of Stock Market Rally” Moguldom, 30 Jan. 2023, https://moguldom.com/435271/top-strategists-at-morgan-stanley-and-jp-morgan-are-skeptical-of-stock-market-rally
3. “Morgan Stanley’s Mike Wilson warns the stock market’s January rally could end this week” MarketWatch, 30 Jan. 2023, https://www.marketwatch.com/story/morgan-stanleys-mike-wilson-warns-the-stock-markets-january-rally-could-end-this-week-11675107367
4. “Morgan Stanley Economists Stick by ‘Softish’ Landing US Forecast” Yahoo! Voices, 22 Jan. 2023, https://www.yahoo.com/now/morgan-stanley-economists-stick-softish-061257780.html
5. “The stock market is underestimating sticky inflation biting profits: Mike Wilson” Markets Insider, 25 Jan. 2023, https://markets.businessinsider.com/news/stocks/stock-market-inflation-sticky-falling-earnings-mike-wilson-morgan-stanley-2023-1