The Wall Street bear that went down in the stock market sees the S&P 500 rise by 7% before falling

Morgan Stanley’s Mike Wilson is one of Wall Street’s most vocal bears. But even he believes that this downward market rally has more room to run.

After the Industrial Average DJIA Dow Jones,
-0.20%,
S&P 500 SPX,
-0.30%
and Nasdaq Composite COMP,
-0.72%
boosted their strongest weekly gains since at least May on Friday, Wilson – who is the US equities strategist and investment director at Morgan Stanley – told customers he could stay up another 5% to 7% on this last recovery of the declining market before US stocks continue their downward trajectory.

Wilson explained in a research note sent to customers on Monday that a 38% to 50% renewal of the stock market selloff so far this year “would not be unnatural or inconsistent with previous bear market rallies”.

However, while growth fears have helped trigger commodity rebates and lower inflation expectations, the fact that the US economy is already slowing down – and may be heading for recession, although this is not the case with Morgan. Stanley — means that any rally is likely to be short-lived and that US stocks are likely to fall lower.

“The bear market is probably not over, although it may feel that way in the coming weeks, as markets receive lower interest rates as a sign that the Fed can orchestrate a mild landing and prevent a substantial revision of earnings forecasts,” he wrote. Wilson in a survey. note sent to Morgan Stanley customers.

Wilson, who has been falling on stocks for about two years, rightly called the selloff this year.

US stocks rallied last week as investors bet that a slowdown in growth and falling commodity prices could inspire the Fed to raise interest rates less aggressively. Fed futures contracts, a by-product used by investors to bet on benchmark interest rates, have begun to be valued with a higher probability that the Fed will be forced to start lowering interest rates again next summer.

They are also forecasting a lower Fed-fund interest rate: now, investors see the US benchmark interest rate exceeding about 3.5% at the end of 2022, compared to 3.75% just a few weeks ago, according to a tool CME Group FedWatch.

Wilson also noted the decline in bond yields, which sent the yield on the 10-year bond TMUBMUSD10Y,
3.239%
at a low of 3.07% on Friday before recovering on Monday.

Wilson expects the S&P 500 to fall around 3,400 if the Federal Reserve manages to make its “soft landing” on the US economy – something Fed Chairman Jerome Powell said last week would be “very difficult” to achieved.

If the US economy slides into recession, Wilson expects the S&P 500 to fall around 3,000. In any case, Wilson believes U.S. stocks are still valued richly as equity risk premium – a measure of investor compensation for the additional risk of holding equities instead of bonds – remains about 300 basis points higher than 10 Public. which is considered the “risk-free interest rate”. This generous premium does not make sense for Wilson, who believes that future gains for the S&P 500 will soon be revised sharply lower to reflect the growing risk of recession.

Reading: How to understand when the bear market is almost over

Wilson is not the only Wall Street general expecting a short-term recovery. JP Morgan’s Marko Kolanovic expects the stock rally to continue this week, as the quarterly and end-of-month rebalancing contributes to stock gains.

Meanwhile, Barry Bannister, head of equities strategy at Stifel, said last week that “circular growth” stocks could help lead to a relief rally that would bring the S&P 500 back to 4,150 points. Wilson expects the index to exceed about 4,200 before heading down.

US stocks moved between gains and losses early Monday, with the S&P 500 up 0.2% at 3,923 in recent trading, while the Dow Jones Industrial Average was up about 80 points at 31,580. The Nasdaq Composite was slightly lower at 11,606.

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