Morgan Stanley Strategist Admits Wrong Call On Stocks, Stays Pessimistic On Earnings

Last December, many experts on Wall Street predicted a downturn for stocks in 2023. Among them was Mike Wilson, the chief US equity strategist at Morgan Stanley, who was particularly bearish, forecasting a drop in the S&P 500 to between 3,000 and 3,200. However, this year has proved to be quite different from what Wilson and others anticipated.

Contrary to expectations, the S&P 500 has surged by approximately 18 percent in 2023, surpassing the average annual return of about 10 percent seen over the past three decades. On July 24, the index closed at a record high of 4,554. Wilson acknowledged his incorrect prediction in a letter to Morgan Stanley clients on that same day.

In the letter, Wilson expressed his apologies for the wrong-way bet, attributing the unexpected market performance to higher valuations, falling inflation, and cost-cutting measures by companies. Inflation, in particular, has seen a significant decline over the past year. While June 2022 witnessed a 9.1 percent growth in inflation, it has now slowed to 3 percent in June 2023.

Despite his admission of error, Wilson maintains a pessimistic outlook for 2023 earnings. He believes that lower inflation could lead to reduced pricing power for companies, potentially impacting their earnings and causing stocks to decline again. His target for the S&P 500 for the current year is 3,900, and he projects it to reach 4,200 in the following year.

Wilson’s bearish stance has not wavered despite the recent market rally. Earlier this year, he warned that the stock market rally would reverse, stating that the fundamental case did not support the current stock prices. However, the market proved him wrong, and the S&P 500 ETF (SPY) broke out to a new year-to-date high, rallying by over 8 percent.

The upcoming earnings season may prove to be a crucial factor in determining the accuracy of Wilson’s predictions. Second-quarter earnings are expected to show a 7 percent decline, and analysts may adjust their forward earnings outlooks based on these results. Depending on how earnings season unfolds, Wilson’s view on the market may either be validated or challenged once again.

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