The worst is yet to come, a leading Wall Street strategist has warned, as investors eye up their prospects after a lackluster end to February trading.
All three of the main U.S. equity benchmarks posted a loss last month as the Dow Jones sunk to its lowest level of the year to date, but Morgan Stanleys chief U.S. equity strategist Mike Wilson says the S&P 500 will be the next index to slump.
Speaking on Bloomberg The Open, the staunch bearvoted the No. 1 stock strategist in an October survey by Institutional Investorsaid he expects to see earnings continue to dip, which in turn could lead the exchange to fall anywhere between 5% and 20% from its current level near 4,000: Our work suggests its going to be down closer to 20% from here, so low three thousands.
Reasoning his pessimistic view, he explained: We dont have a crystal ball, obviously, but what we can confidently say is that the equity risk premium and the multiples do not reflect the earnings risk that we see.
Wilson says this is happening for two reasons. First, he says, is investors have grown more optimistic about the economy. Three months ago most institutional clients thought that a recession was very likely, now theyre thinking its not so likely anymore. So thats a big sea change, he said.
He says the second reason is the high level of liquidity in the markets: Global money supply growth has been more than offsetting what the Fed has been trying to do with tightening financial conditions and has created ebullient environment for asset prices. Thats not sustainable in our view.
October bottom?
As forecasters continue to push their recession predictions into the latter part of the year, some investors are eying October as the month when markets could finally bottom out. Wilson didnt pinpoint an exact month himself, but he sees the market continuing its downward march: We just dont think the bear market is finished because the earnings recession is far from finished.
On the downward earnings trend, Wilson had added that the market had been buoyed by economic data being a little better than expected, leading investors to assume the earnings declines were over. He countered: Some people think the worst is behind us, we think the worst is still probably ahead for most companies.
This isnt Wilsons most dour outlook even in the past few weeks. In a Feb. 20 memo, he wrote that investors were in the death zone having followed stock prices to dizzying heights once again as liquidity (bottled oxygen) allows them to climb into a region where they know they shouldnt go and cannot live very long.
He added the investorslargely in the S&P 500 marketare climbing in pursuit of the ultimate topping out of greed with the expectation they will be able to come back down without catastrophic consequences. However he added: The oxygen eventually runs out and those who ignore the risks get hurt.
Waiting for the point of pain
Wilsons call came as the Bank of America issued a warning that the Fed will be willing to continue to hike rates until it finds the point of pain for consumers, in order to get inflation under control.
In a memo seen by Fortune, economist Aditya Bhave wrote: At this stage, 25bp rate hikes in March and May look extremely likely. We recently changed our Fed forecast to include an additional 25bp hike in June. But the resilience of demand-driven inflation means the Fed might have to raise rates closer to 6% to get inflation back to target.
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