Morgan Stanley Says Too Early to Call All Clear on S&P 500

(Bloomberg) -- Two weeks of rallies in U.S. stocks haven’t been enough to convince one of the widely followed Wall Street strategists to drop his cautious view on the market.

Mike Wilson, Morgan Stanley’s chief U.S. equity strategist ,whose 2018 prediction for a rolling bear market proved prescient, says in his late note to clients that, while he’s less pessimistic about stocks, investors hoping to buy the dip should be aware that Apple Inc.’s sales warning and a plunge in a gauge of U.S. manufacturing are likely the start of a new round of negative news.

“We are definitely more constructive than we have been in over a year based on valuation, sentiment, and positioning, but we don’t think it is time to blow the all clear signal yet,” Wilson wrote in a note to clients. “The weak PMI and AAPL’s miss last week are unlikely isolated incidents.”

Morgan Stanley Says Too Early to Call All Clear on S&P 500

Wilson’s view contrasts with strategists from Bank of America and Citigroup, both of which on Friday urged investors to buy the dip, citing deteriorating investor sentiment. The S&P 500 jumped 3.4 percent Friday, extending a post-Christmas rally to almost 8 percent, after data showed a December spike in hiring and Fed Chair Jerome Powell said monetary policy is flexible and officials are “listening carefully” to the financial markets.

While a change in the Fed’s tone from last year, investors need more assurance than just words after the central bank in December lifted interest rates for a ninth time since 2015, according to Wilson.

“The Fed needs to shift from a more dovish tone to more dovish action (stop raising rates and/or reducing the balance sheet), and we need to get past some incrementally negative data points that we suspect are still lingering,” Wilson said. There are probably “more ‘Apples’ looming out there as we enter 4Q earnings season.”

The S&P 500 will find a hard time sustaining rallies above the range of 2,600 to 2,650, levels that stemmed from declines during 2018 and have now turned into resistance points for the market, according to Wilson.

Moreover, the 14 percent, fourth-quarter rout that sent the S&P 500 to the brink of a bear market may not be over until more companies join Apple in lowering forward earnings guidance. Morgan Stanley’s gauge of earnings revisions, which has fallen to minus 8 percent, might even drop to minus 20 percent, a level last seen in 2016, he said.

Morgan Stanley Says Too Early to Call All Clear on S&P 500

“The bottom line is the overall market will have a hard time bottoming until the earnings revision breadth bottoms,” Wilson wrote. “This will likely keep things choppy and volatile and may even lead to an eventual re-test and break of the lows we saw on December 24th.”

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