Morgan Stanley strategists said U.S. stocks were ripe for a sell-off as the market prematurely priced in a pause in interest rate hikes from the Federal Reserve.
“While recent interest rate hikes support the view that the Fed may remain restrictive for longer, the stock market is refusing to accept that reality,” wrote a team led by Michael Wilson, a well-known Wall Street short-seller, in a report. estimate,S&P 500 IndexIt will end the year at 3,900.
Wilson believes that the U.S. stock market will bottom out this spring due to deteriorating fundamentals and a combination of Fed rate hikes and corporate earnings recession. “Prices are as disconnected from reality as they are during a bear market,” the strategists said.
U.S. 2-year Treasury yields rose above 10-Year Treasury Bond YieldThe range reached a new high since the 1980s, indicating that the public’s confidence in the US economy’s ability to withstand further interest rate hikes is weakening. Meanwhile, the rally in Wall Street, which has enjoyed its strongest start to the new year on record, has begun to cool as Fed Chairman Jerome Powell’s outlook for further rate hikes has weighed on sentiment.
If prices rise more than expected, the U.S. inflation data could be a catalyst to bring investors back to reality and put stocks and bonds in line again, Wilson said. He also noted that expectations for such an outcome have been growing. The U.S. consumer price index (CPI) report for January will be released on Tuesday (14th), and the market expects a monthly increase of 0.5%, the largest increase in three months.
Wilson estimates,S&P 500 IndexThe year will end at 3,900, about 4.7 percent below Friday’s close, and the road to that level could be difficult. He also predicted that stocks would fall as corporate profit expectations slip, before rebounding in the second half of the year.
“The risk-reward is as bad as it has ever been during a bear market,” Wilson wrote in a note. “The reality for equities is that monetary policy remains in a restrictive zone against the backdrop of a corporate earnings recession that has officially begun.”
Wilson is a staunch U.S. stock bear who accurately predicted last year’s sell-off when U.S. stocks had their worst performance since 2008. He was also the highest-ranked strategist in last year’s Institutional Investor survey.
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