A major Wall Street firm is on correctional watch.
Despite the recent market rebound, Morgan Stanley’s Mike Wilson is bracing for the S&P 500 to fall by at least 13% through September.
Wilson cited technical headwinds on CNBC’s Fast Money show Monday.
“It has all the hallmarks of what I would call a bear market rally,” said the company’s chief US equities strategist and chief investment officer. “Things have been oversold.”
He also highlights the tech-heavy Nasdaq, which was up almost 2% on Monday. It’s up more than 13% over the past three weeks.
“The Nasdaq has encountered resistance again here… and is falling back into the 200-day moving average,” Wilson added. “It’s a good time to stay defensive because we’re late cycle.”
He was concerned about the surge in inflation and the US Federal Reserve’s tightening policy, which increases the risk of a recession. It could create an environment where stocks underperform bonds, according to Wilson.
“We don’t think there will be a recession this year. But maybe there could be one next year,” Wilson said. “So the markets will act defensively.”
Wilson, the market’s biggest bear, believes the S&P 500 will eventually end the year at 4,400 points — down about 9% from the index’s Jan. 4 all-time high.
“We strengthen the defense”
“We’re beefing up the defense,” Wilson wrote in his Monday research note. “Growth becomes the main concern of equity investors and no longer higher interest rates.”
Wilson’s market guide spans utilities, consumer staples and healthcare to outperform.
At Fast Money last winter, he also touted the merits of stock picks with defensive qualities and a breakout below 4,000.
“I need something under 4,000 to get really constructive,” Wilson said Jan. 24. “I think that will happen.”
Now he’s open to easing his bearishness if the Fed doesn’t hike rates as quickly or as much.
“That’s probably off the table given inflation,” Wilson noted. “But that would be a real elixir that markets could probably go a little bit further with.”
He also lists better than expected wins as a potential upside wild card. The reporting season for the first quarter starts on Wednesdays of the week.
“If we’re wrong, it’s because of the profits. It won’t be because financial conditions ease again,” Wilson said. “That will be because earnings don’t disappoint as we expect throughout the year.”
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