Morgan Stanley’s Mike Wilson Warns of Fresh Stock-Market Pain
(Bloomberg) -- A little more than two weeks ago, Morgan Stanley’s Mike Wilson warned a 20% plunge in U.S. stocks was a real possibility. Since then, the S&P 500 has weathered bouts of volatility to remain near all-time highs.
Now, skeptics like Wilson can find a more receptive audience as the bond selloff gathers pace and stocks fall in Wednesday trading on a growing supply-side crisis around the world.
It’s all emboldening the strategist in his view that earnings season will do little to temper commodity-fueled inflation fears, just as pent-up consumer demand fizzles out.
“We’re in the final phase of this mid-cycle transition where growth is decelerating and markets correct,” he said in a telephone interview.
While the S&P 500’s multiple has already slipped to 20 times its coming year’s earnings, the analyst sees a further decline to 18 in the near-term. Combine that with the likelihood of corporate profits falling from here, and it’s hard to justify stock prices at near-record levels.
“We’ve been calling for this 10-20% correction that would be led by tech stocks,” said Wilson. “We think earnings estimates are too high.”
U.S. stocks fell in early Wednesday trading and European benchmarks dropped as much as 2% while the Treasury selloff extended for a third day. The S&P has defied numerous warnings to double from its Covid trough, but investors are now grappling with inflationary conditions unseen over the past year, while the Federal Reserve is set to taper stimulus.
Meanwhile, one gauge of consumer prices is rising at the fastest pace in three decades to send benchmark Treasury yields to three-month highs. That’s bad news for stock benchmarks like the S&P 500 and the Nasdaq 100, which are highly weighted toward Big Tech stocks. These long-duration assets have rallied with bonds over the past decade to lofty valuations.
At the same time, retail investors have become increasingly absent as buyers of the dip, with support levels in the S&P 500 giving way in the aftermath of the China Evergrande crisis.
“The retail community have been very resilient, but eventually if they buy the dip and it doesn’t work they don’t buy the next dip. That’s what happened a few weeks ago when the S&P pulled back below the 50-day average,” said Wilson.
At Barclays Plc, strategists led by Emmanuel Cau warn stock volatility is set to return, though they still remain positive on the asset class on the potential for earnings to offset faster inflation. The team recommends value stocks -- cheap, typically cyclical names like banks and energy producers that tend to gain along with bond yields.
“As policy makers unwind reflationary measures, growth and liquidity conditions won’t get any better and macro volatility should rise,” the analysts wrote in a Wednesday note. “But we believe final demand will stay firm as both corporates and the consumer are in good shape.”
©2021 Bloomberg L.P.