Have Stocks Reached Their Limit? Expert Issues Warning

Morgan Stanley Warns of Stock Market Correction While Citigroup Remains Bullish

Wall Street expert Michael Wilson from Morgan Stanley is not optimistic about the recent positive shift in stock markets. He believes that reduced government support, lower market liquidity, and declining inflation will impact the US stock market’s rally in the year’s second half. Wilson is concerned that stock prices have already reached their limit due to excessive liquidity from banking bailouts. He states that if economic growth doesn’t meet expectations, investors may face an unwelcome surprise due to the high level of risk-taking. 

They anticipate slowing inflation to impact revenue growth, which is not reflected in consensus forecasts. Based on Wilson’s analysis, lower-than-expected producer prices indicate a potential decline in revenue growth over the next four months, supporting their below-average earnings forecast. Recommended trade ideas from the strategists include favouring consumer staples, defensive stocks, healthcare, and companies with high operational efficiency. They advise avoiding firms with high financial leverage due to expectations of continued high-interest rates.

In contrast, Citigroup’s strategists hold a more optimistic view, noting the most bullish positioning in US equity futures since 2010. The crucial question for them is whether this positive momentum will persist or if profit-taking and hedging activities will dampen market performance.

Wilson’s Bearish Prediction for the S&P 500 in Early 2023

During November 2022, Wilson, made a prediction about a potential significant decline in the stock market. According to Wilson, the S&P 500 index could experience a drop of up to 24% in early 2023. He based this prediction on the expectation of downward revisions in corporate earnings, which could have a major impact on stock performance. Wilson projected that the S&P 500 could reach a range between 3,000 and 3,300 within the first four months of the following year. Although he acknowledged the possibility of a short-term rally, Wilson cautioned that the bear market was not yet over and believed that if his earnings forecast proved accurate, the market could experience even lower levels.

A Recap of the Stock Market Performance in the First Half of 2023

The stock market in the first half of 2023 showed a mixed and volatile performance. US stocks rallied strongly, fuelled by expectations of higher profits from artificial intelligence. However, the market faced challenges and uncertainties such as the COVID-19 pandemic, inflation, interest rate hikes, geopolitical tensions, and corporate earnings. Here are some key points about the stock market performance during that period:

The S&P 500 index rose by approximately 7% in the first quarter, benefiting from vaccine rollout optimism, fiscal stimulus, and economic reopening.

The Nasdaq Composite index had a significant increase of nearly 17% in the first quarter, driven by the resurgence of technology stocks.

The Dow Jones Industrial Average index had a modest gain of around 0.4% in the first quarter, hindered by lower oil prices, weaker consumer spending, and supply chain disruptions.

In the second quarter, the stock market performance was subdued and choppy, with the S&P 500 ending with a modest 3% gain, while the Nasdaq Composite and the Dow Jones Industrial Average both experienced slight declines of around 1%.

The technology, consumer discretionary, healthcare, and communication services sectors were among the best-performing sectors, benefiting from innovation, growth, and resilience during the pandemic.

On the other hand, the energy, financials, industrials, and materials sectors were the worst performers, facing challenges such as lower oil prices, higher interest rates, weaker demand, and increased costs.

Bottom line

Wilson acknowledges that his team’s predictions regarding the S&P 500 this year have been significantly incorrect, to the point where they have questioned the reliability of their earnings model. However, they have chosen to maintain their forecasts.

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