“The risk-return ratio for stocks is now ‘very poor’, especially as the Fed is far from finished with its monetary tightening, rates remain higher along the curve, and earnings expectations are still between 10% and 20% too high,” Wilson wrote in a note.
The strategist ranked first in last year’s Institutional Investors survey when he correctly predicted the stock sell-off.
After plunging into a bear market last year, US stocks rallied in 2023 as signs of lower inflation prompted bets that the Fed could slow the pace of rate hikes. However, policymakers warned that interest rates could rise further as price pressures remain elevated, while a gloomy outlook for corporate earnings has dampened risk sentiment in recent days. The S&P 500’s so-called MACD momentum, which shows the relationship between two moving averages of a security’s price, is now weakening, according to data compiled by Bloomberg.
Other analysts on Wall Street also warned that the rally in stock markets may have gone too far. JPMorgan Chase & Co.’s Mislav Matejka said this week that bets on resilient economic growth and a Fed turnaround are premature, while Bank of America Corp. strategist Michael Hartnett forecasts that the S&P 500 falls to 3,800 points by March 8, implying falls of approximately 7% from current levels.
Wilson of Morgan Stanley is much more pessimistic, saying that the benchmark index may fall as low as 3,000, a 26% drop since its last close, in the first half of 2023.
That is “very much out of consensus at this point”, especially as active retail and institutional investors are more bullish than they have been in more than a year, the strategist said.
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