Slower Economic Growth Anticipated:
Morgan Stanley’s Mike Wilson, renowned for his bearish outlook, predicts that economic growth will fall short of expectations, leaving U.S. equity investors possibly disillusioned with their hopes of soaring market indexes.
Strong Market Performance in 2023:
Despite Wilson’s warnings, the S&P 500 has experienced a robust 18% increase, while the Nasdaq has surged by approximately 43% this year.
Cracks in the Optimistic Outlook:
Wilson suggests that there are emerging concerns in the seemingly positive economic outlook. Markets are now expecting a significant growth resurgence, which Wilson believes is unlikely for the rest of the year, particularly in consumer-related areas.
Market’s Tendency to Follow Trends:
Wilson points out that markets tend to follow trends, whether they are upward or downward. The substantial increase in stock prices this year has fostered a shift from a bearish consensus at the start of 2023 to a fundamentally bullish one.
High Valuations Raise Concerns:
Stocks have reached forward price-earnings multiples of 20 times on the S&P 500, implying that they are not only anticipating higher earnings and growth but also demanding it. Wilson has previously warned that stocks are in a “death zone” where investors cannot easily withdraw from high stock prices without potentially dire consequences.
Limited Broad-Based Gains:
While certain stocks, notably the “Magnificent Seven” including Apple, Microsoft, Google’s Alphabet, Amazon, Nvidia, Tesla, and Meta, have had exceptional gains this year, this trend hasn’t spread throughout the market. The broader market remains weak, suggesting a selective focus on megacap growth stocks.
Consumer Spending and Economic Sustainability:
Although consumer spending has remained robust in the face of inflation, it’s worth noting that savings have begun to decrease, indicating that consumers are depleting their pandemic savings. Wilson suggests that stocks might start questioning the sustainability of the economic resilience seen in the first half of the year, emphasizing the importance of a defensive growth posture in portfolios.