In a characteristic warning to investors, Morgan Stanley’s Mike Wilson has bad news for the stock market.
The staunch bear wrote in a note on Tuesday he believes economic growth will be lower than estimated, disappointing U.S. equity investors hoping to see indexes soar even higher.
Indeed, the S&P 500 has enjoyed a surprisingly strong 2023—up 18% for the year to date—while the Nasdaq is up approximately 43% for the year to date at the time of writing.
Many investors are expecting the good times to keep rolling, after tech stocks were buoyed by recent buzz around AI and the economic outlook began shoring up as the Fed’s rate hikes began bearing fruit.
Likewise in June, the Fed released its predictions for U.S. economic growth to—albeit by a small amount—avoid a recession. The consensus across Federal Reserve Board members and Federal Reserve Bank presidents is a median of 1% in 2023, 1.1% in 2024, and 1.8% in 2025.
But Wilson—voted the No. 1 stock strategist in an October survey from Institutional Investor—says there are cracks beginning to appear in the seemingly optimistic outlook.
“At current prices, markets are now expecting a meaningful reacceleration in growth that we think is unlikely this year, especially for the consumer. Potentially softer September and October data is not priced into many stocks and expectations,” Wilson wrote in a note seen by Bloomberg.
The chief U.S. equity strategist for Morgan Stanley explained his point further during his Thoughts on the Market podcast this week, saying the market often fails to realize that a trend—be it gains or losses—isn’t a guarantee for the future.
Wilson said the move higher in stocks this year has provided the confidence for a bearish consensus at the start of 2023 to switch to a “fundamentally bullish” outlook.
“It’s human nature to want to go with the trend both up and down,” Wilson reasoned.
“The entire move in the major U.S. equity averages this year has been the result of higher valuations,” he explained. “However, with forward price earnings multiples reaching 20 times on the S&P 500 last month, not only are stocks anticipating higher earnings and growth, but they now require it.”
This necessity is a warning Wilson has offered before—saying in February share prices are in the “death zone” where investors simply cannot afford to back out of “dizzying” stock prices and are instead hoping their portfolios will survive without “catastrophic consequences.”
Limited wins
Wilson also pointed out that although some stocks are enjoying exceptional returns, the trend isn’t spreading.
The so-called Magnificent Seven—a group that includes Apple, Microsoft, Google owner Alphabet, Amazon, Nvidia, Tesla, and Meta—have had a solid 2023.
For the year to date, Apple is up 51%, Microsoft is up 39%, Alphabet is up 52%, Amazon is up 60%, Nvidia is up 240%, Tesla is up 137%, and Meta is up 140%.
Sounds great, right? Wrong.
Wilson concedes that he—and many others—were overly negative following the collapse of regional banks like SVB earlier in the year, but were forced to change their minds when a recession failed to appear.
But strong growth in a handful of stocks isn’t a sign the market overall is in a good place, Wilson said, as the growth is limited to a “narrow…handful of megacap growth stocks.”
On the podcast he continued: “In June, breadth improved, dragging investor confidence toward the optimistic fundamental outcome. But since then, breadth has rolled over again and remains weak. We recommend maintaining a late-cycle mindset, which means a barbell of growth stocks and defensive, not cyclicals or smaller stocks.”
Stocks are questioning sustainability
Although consumer spending is remaining strong in the face of inflation—it was up 0.8% in July—shoppers’ pandemic war chests are beginning to run dry.
Last week the Commerce Department said savings were beginning to fall—down 3.5%—and the Federal Reserve Bank of San Francisco says individuals have spent nearly all of their lockdown-accumulated savings.
As a result, Wilson continued: “We think stocks may be starting to question the sustainability of the economic resiliency we experienced in the first half of the year. Defensives and growth stocks have done better than cyclicals.
“We continue to recommend a more defensive growth posture in one’s portfolio given that the fears of recession or financial distress could return at any moment in the late cycle environment in which we find ourselves, particularly as we enter September.”
