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Wall Street’s top strategist says stocks should jump if Republicans win at least one house of Congress in midterms

November 7, 2022, 11:06 AM UTC
Michael Wilson, chief U.S. equity strategist at Morgan Stanley, correctly predicted this year’s slump in stocks.
Christopher Goodney—Bloomberg via Getty Images

Investors should stay bullish on equities ahead of this week’s US midterm elections, according to Morgan Stanley’s Michael Wilson, the top-ranked strategist who correctly predicted this year’s slump in stocks.

Polls pointing to Republicans winning at least one chamber of Congress provide a potential catalyst for lower bond yields and higher equity prices, which would be enough to keep the bear-market rally going, Wilson wrote in a note Monday.

Americans head to the polls on Tuesday to decide control of both chambers of Congress, the governorship in 36 states, and countless other local races and ballot initiatives. A “clean sweep” by the Republicans could greatly increase the chance of fiscal spending being frozen and historically high budget deficits being reduced, fueling a rally in 10-year Treasuries that can keep the equity market rising, Wilson said.

This week is also significant for markets as a US consumer-price index reading on Thursday will show if Federal Reserve rate hikes are cooling inflation. The central bank increased rates by 75 basis points for a fourth time in a row last week and Chair Jerome Powell said the cost of borrowing will be higher than previously expected. That put a spanner in the works of the recent rally, with the S&P 500 Index posting its worst week since September.

Wilson and his team said short-term volatility should be expected ahead of the midterm results, especially given anxiety around the consumer prices release.

Still, they have a tactically bullish stance on equities, saying rate volatility can come down further.

JPMorgan Chase & Co. strategists also have a bullish outlook on stocks against the backdrop of a potential peaking in bond yields, “very downbeat” sentiment and positioning and good seasonal factors, they wrote in a note on Monday.

For the S&P 500 to reach Morgan Stanley’s upside targets of 4,000 to 4,150 — a rally of as much as 10% from the last close — “we need to see back-end rate levels begin to fall, too,” Wilson wrote.

The strategists use 3,625 to 3,650 as their stop-loss level for the S&P 500. They also said clients should consider exiting bullish trades if the 10-year Treasury yield makes new highs at 4.35%, which would reduce the odds of the S&P 500 reaching 3,950 considerably.

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