- Strategists across Wall Street are warning stocks are in for more pain, despite the strong start to 2023.
- Morgan Stanley’s Mike Wilson compared investors buying stocks now with ill-prepared climbers on Mount Everest.
- Here’s what experts at some of the biggest banks are saying about what’s ahead for stocks.
The stock market has climbed to start the new year despite hot economic data suggesting more interest rate hikes from the Federal Reserve are on the way, and the disconnect has caused some of Wall Street’s top analysts to warn that investors need to brace for more pain to come.
Morgan Stanley’s top strategist Mike Wilson wrote in a note this week that stocks have soared too high too fast, and those highs will ultimately prove unsustainable.
Over the last seven weeks, the S&P 500 has climbed about 4.5%, and the Nasdaq 100 has jumped more than 11%.
Wilson illustrated his point by comparing the current enthusiasm to ill-prepared climbers scaling Mount Everest.
“Many fatalities in high-altitude mountaineering have been caused by the death zone, either directly through loss of vital functions, or indirectly by wrong decisions made under stress or physical weakening that lead to accidents,” Wilson wrote. “This is a perfect analogy for where equity investors find themselves today, and quite frankly, where they’ve been many times over the past decade.”
Wilson has been warning of an earnings recession among US companies for some time, arguing that investors aren’t ready for the inevitable weakness that’s ahead. Inflation, he argues, is eating into profits and that will be on full display in the coming quarters.
Investors are ignoring economic data
Bank of America has echoed Wilson’s bearishness, with the firm’s analysts predicting all of the S&P 500’s gains to vanish by early March.
January’s inflation reading, among other economic data, showed prices aren’t cooling as fast as the Fed wants, BofA said, which opens the door to more aggressive policy. Add to that a labor market that shows no sign of weakening and a strong US consumer, and the Fed – and therefore the stock market — is looking at a difficult road ahead.
“Payroll, retail sales, inflation; mission very much unaccomplished for Fed despite 450bps tightening,” according to Bank of America.
Even the inverted yield curve, one of history’s most reliable recession indicators, hasn’t been able to scare the market with its warning of an imminent downturn.
Investors, meanwhile, are piling into the riskiest, most speculative assets, and that’s going to make an ensuing crash hurt even worse, according to JPMorgan’s Marko Kolanovic.
“There is an old adage ‘don’t fight the Fed,’ but this behavior is not just fighting but also taunting the Fed with crypto, meme stocks, and unprofitable companies responding best to Fed communications,” Kolanovic wrote in a note to clients last week.
So far this year, retail investors are spending a record $1.5 billion per day scooping up stocks, according to Vanda, and Kolanovic likens that to investors daring the central bank to squash still-hot equity prices.
He said the bidding-up of these speculative stocks suggests a bout of massive market volatility could be just around the corner.
The bulls are still out, to be sure. Fundstrat’s Tom Lee, a prominent Wall Street bull, highlighted in a Wednesday note that stocks have remained resilient through past Fed tightening cycles, suggesting that Powell’s aggressive policy doesn’t necessarily foretell a stock crash.
Stocks have posted winning performances in 11 of 14 such cycles since 1970, according to Lee.
“The point is that a tough Fed doesn’t mean stocks need to fall at every hint of an inflation data point,” he wrote. “This means a higher terminal rate is not the death knell for stocks.”