Mike Wilson, the biggest equity bear on Wall Street whose prediction has proved prescient this year, has a similar outlook for 2019.
The chief U.S. equity strategist at Morgan Stanley forecast that the S&P 500 will end next year at 2,750, the same level he forecast for 2018. That’s about 3 percent above the index’s current level. With five weeks to go for the year, Wilson’s estimate is by far the closest of all estimates to coming true.
Wilson has stood out this year in predicting a “rolling bear market,” where financial assets suffer a series of blows amid rising interest rates and a less-synchronized global economic expansion. That’ just how things have unfolded, with turmoil in emerging markets followed by a tech-led rout in U.S. equities and then a sell-off in the credit market.
Prospects for a “material” deceleration in corporate profits underpin Wilson’s persistent caution. As the benefit from tax cuts wears off and global growth weakens, the rate of earnings expansions for S&P 500 companies will slow to 4.3 percent in 2019 from 23 percent this year. And the odds of two consecutive quarters of negative growth is higher than 50 percent, he predicts.
The Federal Reserve, which Wilson expects to pause its interest-rate hikes in June, will help offset the negative profit backdrop. The fastest valuation contraction since 2011, with the S&P 500’s price-earnings ratio falling 18 percent from last year’s peak to a low of 15 in October, also helps, he said.
“In short, the Rolling Bear is tired from all the mauling he has done this year,” Wilson said in a note to clients. “However, he is likely just resting rather than hibernating.”
The final leg of this rolling bear market won’t come until analysts give up on their robust estimates, he said. At $171 a share, Morgan Stanley’s profit forecast is about $4 below the consensus for next year.
As expectations are reset and the market tries to come to terms to the growth trajectory, stocks will swing wildly, Wilson said. He reiterated his view that the S&P 500 is likely to be trapped in a range of 2,400 to 3,000 next year.
“We see a material slowdown in earnings growth coming next year, but recognize that until evidence is in hand and earnings revisions begin falling, the market could temporarily overshoot our base case target,” Wilson said. “We think such overshoots are to be sold until earnings revisions to the downside are complete.”
Investors should go defensive, favoring large-cap stocks over small-caps. He cut the rating for industrial shares to equal weight from overweight while upgrading consumer staples and REITs to overweight from equal weight.