One of the market’s biggest skeptics is going back to his old ways.
Morgan Stanley strategist Mike Wilson warned that the rally that has gripped markets in recent weeks is aging and overdue for a breather.
“As predicted, falling interest rates at the tail end have resulted in modest further gains for this bear market rally,” Wilson wrote in a new note Monday. “However, with last week’s price action, the S&P 500 is now right within our original tactical target range of 4000-4150. While the index is slightly above its 200-day moving average and the breadth continues to widen, the downtrend for the year remains in place. This makes the risk/reward ratio to play more upside quite poor at this point and we are now sellers again.”
A few weeks ago, Wilson correctly predicted the upturn in the market. And after a brutal year for investors, the rally was warmly welcomed.
Gains were spurred by a fall in the US dollar, signs of peak inflation and a Federal Reserve that may be on the verge of slowing the pace of rate hikes.
But a hotter-than-expected November jobs report last week – which questions the potential for a more dovish Fed – and renewed COVID-19 lockdowns in China have clouded that optimistic thesis.
“Stay defensively oriented (healthcare, utilities, staples) as rates are likely to fall further next year as growth and inflation continue to ease,” advised Wilson. “Growth stocks are unlikely to benefit from falling interest rates given the earnings risks, particularly for tech and consumer-facing companies that have large weights in growth indices.”
Other Wall Street strategists also remain cautious on stocks to round out 2022.
said Goldman Sachs it sees no earnings growth for S&P 500 companies and no appreciation for the benchmark index over the next year.
“We remain relatively dovish over the three-month horizon, with further headwinds expected from likely rising real yields and continued growth uncertainty,” said Goldman Sachs strategist Christian Mueller-Glissmann.