Wall Street’s most vocal bear foresees a significant correction for U.S. stocks, even as benchmarks hit new records. However, he views the impending pullback as an opportunity to invest in the market’s next upward move.
Morgan Stanley’s chief investment officer, Mike Wilson, has held a bearish stance on markets for the past three years. In the spring, he reluctantly raised his S&P 500 price target to 5,400 points as inflation eased and the economy appeared to be heading towards a soft landing, avoiding recession.
That adjustment still placed him far behind his Wall Street peers in predicting gains for U.S. stocks, which continue to defy the Federal Reserve’s hawkish interest-rate stance. The dominant performance of megacap tech names overshadows muted gains in other sectors.
Five stocks – Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) – make up about 28% of the S&P 500’s market weight, the highest concentration on record. Nvidia’s soaring first-half gain of around 150% was responsible for about a third of the S&P 500’s 14.5% advance, the single-largest contributor since Apple in 2020.
Speaking on Bloomberg Television, Wilson highlighted the concentration of gains in tech. He stuck to his spring target call for the S&P 500, suggesting that the “likelihood of upside from now until year-end is very low, much lower than normal.”
Morgan Stanley’s Wilson: Correction Coming
“I think the chance of a 10% correction is highly likely sometime between now and the election,” Wilson said. He added that investors are likely to endure a “choppy” third quarter leading into the November presidential decision.
Second-quarter earnings will be crucial for the market’s near-term performance, with JP Morgan (JPM), Wells Fargo (WFC), and Citigroup (C) starting the blue-chip updates on July 12.
Financial-sector profits will likely contribute only around 18% of the S&P 500’s expected earnings tally of $495.2 billion, according to LSEG data. The bulk of gains are forecast to come from information technology and communications services.
This level of concentration, which has defined the S&P 500’s year-to-date gain of around 17%, also factors into Wilson’s bearish outlook.
“The average company has not had good earnings results,” Wilson said, adding that “valuations to me look very unexciting.”
FactSet data suggest that stocks are trading at historically high valuations, with the forward price-to-earnings multiple of the S&P 500 pegged at 21.2, compared to the five-year average of around 17.2.
The Bullish Bear: A 10% Drop = Opportunity
In the first-quarter earnings results, stocks from IT and communications services contributed around 32.8% of the S&P 500’s $472.1 billion in profits, up from about 27% over the three months ending in December.
Wilson’s S&P 500 price target of 5,400 points still places him on the bullish side of Wall Street, where the median year-end forecast for the benchmark sits at around 5,250 points.
The strategist sees value in high-quality growth stocks. He suggests investors focus on individual names with strong balance sheets and a track record of earnings growth, rather than a passive index strategy, as he waits for the impending correction.
“If they were to come in 10%, then we would probably get interested again,” Wilson said.
