What You Need to Know
- “We’re in the final phase of this mid-cycle transition where growth is decelerating and markets correct,” said the chief investment officer and U.S. equity strategist.
- U.S. stocks fell in early Wednesday trading and European benchmarks dropped as much as 2% while the Treasury selloff extended for a third day.
- At the same time, retail investors have become increasingly absent as buyers of the dip, with support levels in the S&P 500 giving way in the aftermath of the China Evergrande crisis.
A little more than two weeks ago, Morgan Stanley’s Mike Wilson warned a 20% plunge in U.S. stocks was a real possibility. Since then, the S&P 500 has weathered bouts of volatility to remain near all-time highs.
Now, skeptics like Wilson can find a more receptive audience as the bond selloff gathers pace and stocks fall in Wednesday trading on a growing supply-side crisis around the world.
It’s all emboldening the strategist in his view that earnings season will do little to temper commodity-fueled inflation fears, just as pent-up consumer demand fizzles out.
“We’re in the final phase of this mid-cycle transition where growth is decelerating and markets correct,” he said in a telephone interview.
While the S&P 500’s multiple has already slipped to 20 times its coming year’s earnings, the analyst sees a further decline to 18 in the near-term. Combine that with the likelihood of corporate profits falling from here, and it’s hard to justify stock prices at near-record levels.
“We’ve been calling for this 10-20% correction that would be led by tech stocks,” said Wilson. “We think earnings estimates are too high.”
U.S. stocks fell in early Wednesday trading and European benchmarks dropped as much as 2% while the Treasury selloff extended for a third day.
The S&P has defied numerous warnings to double from its Covid trough, but investors are now grappling with inflationary conditions unseen over the past year, while the Federal Reserve is set to taper stimulus.