© Reuters. ‘The price is wrong’: S&P 500 could drop to 3400 after another bear market rally, says Morgan Stanley’s Wilson
Morgan Stanley’s top equity strategist, Michael Wilson, once again reiterated his bearish stance in a note sent to clients over the weekend.
Wilson, who correctly predicted that US stocks will fall in response to the Fed’s hawkish actions, now says stocks still have a lot to fall. The strategist noted that investors are now realizing that growth is slowing and we should thank the Q1 earnings season for that.
“First, while most companies easily beat consensus EPS guidance, the bar was lowered in the quarter more than usual. Second, the ratio of negative to positive earnings revisions has skyrocketed. Third, earnings quality has deteriorated as incremental operating margins have been rolled over for many companies and sectors, including many large-cap tech stocks. Finally, Q2 estimates for the declined while full-year estimates remained unchanged. This effectively raises the bar for the second half of the year, which is about when the economy will feel the effects of rising rates and other headwinds,” Wilson told clients.
More importantly, Wilson notes that the market has positioned itself for higher rates, but adds that “we’re just not there yet.” On what needs to happen for the selloff to be overdone, Wilson says either the valuation falls to levels (S&P 500 multiples in the 14-15 range) or earnings estimates are reduced.
“With valuations now more attractive, equity markets so oversold and rates potentially stabilizing below 3%, equities appear to have embarked on another significant bearish rally. After that, we remain confident that lower prices are still to come. In terms of the S&P 500, we believe this level is near 3,400, where both valuation and technical support are,” the strategist concluded.
By Senad Karaahmetovic