By A lot can change in a year — just ask Morgan Stanley’s Mike Wilson.
Last fall, Wilson, the esteemed U.S. equity strategist at Morgan Stanley, found himself amidst a triumphant wave of vindication. He accurately predicted the devastating impact of inflation on the market, which led to a decline in both U.S. stocks and bonds. Surprisingly, he stood out among a select few on Wall Street who foresaw this outcome.
However, Wilson is now humbling himself and admitting his misjudgment in a recent client note. Despite occasional disagreements from clients regarding his bearish views, he confesses, “we were wrong” about the extent to which fading inflation and the rise of artificial intelligence would accelerate market growth in 2023.
In his note dated Monday, Wilson mentions, “Last October, we made a tactically bullish call based on the belief that inflation had reached its peak, alongside declining long-term interest rates and a weakening U.S. dollar. However, the surge in equity multiples resulting from this narrative, along with other factors as discussed above, has surpassed our expectations and endured for longer than anticipated. In short, we were mistaken.”
Despite maintaining their stance on persistent inflation, declining corporate earnings, and the banking crisis in March, Wilson and his team initially made a strategically optimistic call in October. This call came shortly after the S&P 500 index hit its lowest point on October 12, recording a 52-week closing low of 3,577.03.
The ever-changing nature of the financial landscape demands constant reevaluation. Wilson’s revelation is a reminder that even the most experienced professionals occasionally need to reassess their perspectives in light of new information.
A Contrarian View: Reassessing the S&P 500’s Future Performance
In an unexpected turn, Wilson, a prominent analyst, is not joining the bullish camp. Instead, he presents a distinct perspective on the S&P 500’s potential trajectory. With a new price target of 4,200 by June 2024, Wilson anticipates a significant increase of approximately 300 points compared to his year-end target for 2023, which currently stands at 3,900. Surprisingly, his projection places the index over 350 points below its present trading value, as confirmed by FactSet data.
Wilson’s rationale for this contrarian stance lies in his concern over the potential consequences of slowing inflation. He believes that reduced inflation could hinder the ability of American companies to raise prices, subsequently impacting their earnings in the future. Furthermore, the upcoming resumption of student loan payments in September adds to the perceived headwinds that could further dent corporate earnings, as suggested by Wilson and his team.
Throughout this year’s market rally, driven by inflation and the fervor surrounding artificial intelligence, it is the US technology giants such as Microsoft Corp. and Alphabet Inc. that have significantly benefited. These companies have experienced an exponential boost in market capitalization. The S&P 500 has surged by an impressive 18.6% year-to-date through Monday, while the Nasdaq Composite has seen an even more remarkable rise of over 34%. Even the Dow Jones Industrial Average, which has lagged behind throughout the year, has recently demonstrated a notable upward surge, resulting in a 6.8% increase in value for the year.
Wilson’s unconventional viewpoint challenges mainstream optimism and prompts investors to consider the potential hurdles ahead that could impact stock performance. As we navigate this dynamic landscape, future market developments will undoubtedly shed light on the validity of Wilson’s contrarian outlook.
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