Morgan Stanley’s Michael Wilson, one of the few Wall Street strategists to see last year’s equities rout coming, has been among the market’s leading pessimists throughout 2023. But on Monday, after months of soaring stocks, he changed his tone and now sees the rally running further.
US stocks are tracking the same path they did in 2019 — one of the best years for the S&P 500 Index over the past decade as it handed investors a 29% return, Wilson wrote in a note to clients. The S&P 500 is up 20% this year, almost the same return it posted in 2019 across the same period.
“The 2019 analogy, in and of itself, suggests more index level upside from here, though we’d note that the Fed was already cutting rates for a good portion of 2019, and the market multiple is already close to 1 turn higher than where it peaked during that period,” he wrote.
Last week, Wilson acknowledged in his weekly note that he was wrong in his call for 2023. Still, his year-end target for the S&P 500 stands at 3,900, implying a 15% drop from from where it’s currently trading at around 4,590.
“The data we have today suggests to us that we are in a policy-driven, late-cycle rally,” Wilson wrote. The most recent example of this occurred in 2019 when the Federal Reserve paused interest rate hikes and then cut rates as its balance sheet expanded toward the end of the year.
“These developments fostered a robust rally in equities that was driven almost exclusively by multiple and not earnings, as has been the case this year,” Wilson said.
The Fed lifted borrowing costs last week for the 11th time since March 2022 as the central bank seeks to bring inflation down to it 2% goal. It’s clearly making progress, as data released Friday showed the Fed’s preferred inflation measure, the personal consumption price index, had its smallest increase in more than two years and the employment cost index posted its slowest advance since 2021.
Traders are pricing in a small chance of further interest rate hikes this year, with rate cuts expected staring early in 2024.
Meanwhile, Fed economists no longer expect the US to enter a recession this year — further fueling soft landing optimism that has driven US stocks higher this year. And number of Wall Street firms, including Deutsche Bank and Goldman Sachs Group Inc., have loosened their calls for an economic downturn.
Now Wilson has joined this group, but not without caveats.
“We’d like to see a broader swath of business cycle indicators inflect higher, breadth improve and front-end rates come down before adjusting our stance in this regard,” he wrote.
–With assistance from Sagarika Jaisinghani.