A major Wall Street firm is on corrective watch.
Despite the latest market rally, Morgan Stanley’s Mike Wilson is bracing for the S&P 500 to drop at least 13% by September.
Wilson cited technical headwinds on CNBC’s “Fast Money” on Monday.
“It has all the hallmarks of what I would call a bear market rally,” said the company’s chief US equity strategist and chief investment officer. “Things got oversold.”
He also singled out the tech-heavy Nasdaq, which rose nearly 2% on Monday. It has increased by more than 13% in the last three weeks.
“The Nasdaq again encountered resistance here…returning to the 200-day moving average,” Wilson added. “It’s a good time to stay defensive because, look, we’re at the end of the cycle.”
He worried about the surge in inflation and the Federal Reserve’s tightening policy which increases the risk of recession. This could create an environment, according to Wilson, where stocks perform worse than bonds.
“We don’t think there will be a recession this year. But maybe next year there might be one,” Wilson said. “So the markets are going to trade defensively.”
Wilson, the market’s biggest bear, estimates the S&P 500 will ultimately end the year at 4,400, down about 9% from the index’s all-time high on Jan. 4.
“We are doubling the defenses”
“We’re doubling up on defenses,” Wilson wrote in his Monday research note. “Growth is becoming the primary concern for equity investors rather than higher rates.”
Wilson’s market playbook includes utilities, consumer staples and healthcare to outperform.
On “Fast Money” last winter, he also touted stock picks with defensive qualities and a flurry below 4,000.
“I need something below 4,000 to get really constructive,” Wilson said Jan. 24. “I think it will happen.”
Now, he’s ready to ease his downtrend if the Fed doesn’t raise rates as quickly or as hard.
“That’s probably out of line given the inflation that’s out there,” Wilson noted. “But it would be a real elixir that would allow the markets to probably go a little further.”
He also lists better-than-expected earnings as a potential upside wild card. The first quarter earnings season begins one week from Wednesday.
“If we’re wrong, it will be on earnings. It won’t be because financial conditions ease again,” Wilson said. “It will be because earnings don’t disappoint as we expect over the course of the year.”
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