February 21, 2023

Morgan Stanley's Wilson warns stock market will retest October lows, could fall more than 20%

A resilient U.S. labor market and stubborn inflation have taken a pause from the Federal Reserve off the table and will lead to another steep decline for stocks, according to Morgan Stanley’s Mike Wilson. The equity strategist strategist said on CNBC’s “Squawk Box ” that the Fed will continue to hike rates through the spring and put the stock market’s recent rally at risk. “The Fed doesn’t want to give any chance to inflation rearing its head again. We think there’s at least two more hikes, maybe three, going into June,” Wilson said. “That got priced in to the bond market over the past 30 days, but stocks seem to have ignored it. What we’re left with is is stocks are more expensive. And even though parts of the economy appear to be on solid footing, corporate earnings are still likely to see “degradation” in the coming quarters, he said. The strategist warned that the stock market could possibly fall more than 20% and see the the S & P 500 trade in a range of 3,000 to 3,300, and was in for “at least a retest of the October lows.” The S & P 500 closed at 3,583 on Oct. 14, or 12.2% below its Friday close. .SPX 6M mountain The S & P 500 fell into the 3,500s in October Wilson’s comments to CNBC came after a note dated Feb. 19 that warned that stocks had risen “into thin air” and were due for a sharp pullback. He compared the stock market to mountain climbers who had gone too high on Mount Everest and entered the “death zone,” with valuations hard to justify based on the outlook for earnings. Wilson also pointed to central bank activity in Japan and China and a weaker U.S. dollar as reasons that global liquidity has increased, making the Fed’s hikes less effective and helping fuel the recent rally in stocks. “Even with the Fed hiking, if you get global liquidity offsetting that, that’s the story. We think that will start to fade, though,” he said. Despite his cautious outlook, Wilson said that the stock market is not in for a multi-year rough patch. “We’re actually quite positive on 2024 and ’25, but we just have to get through this valley,” Wilson said.

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