Morgan Stanley’s Mike Wilson believes that a market reversal is in sight, despite growing concerns about higher-for-longer oil prices and prolonged hostilities in the Middle East.
In a new episode of the bank’s Thoughts on the Market podcast, the Morgan Stanley CIO says data shows that the market correction is well into the late stages, countering headlines and claims that investors have been complacent.
“First, the US equity market is far less complacent about growth risks than people think. Consider this. More than half of the Russell 3000 stocks are down at least 20% from their highs, while the S&P 500’s price-earnings multiple is down 17%. That’s not complacency. That’s a well-advanced correction consistent with prior growth scares, if not an outright recession.”
As for oil, Wilson says it is on top of everyone’s minds because supply shocks have historically ended business cycles. But the Morgan Stanley executive highlights that investors are not pricing in a recession because corporate earnings are on the up and up.
“Historically, oil spikes have often ended business cycles. However, recessions only occurred when earnings growth was decelerating or outright negative. Today, it’s accelerating and running close to 14%, while forward earnings growth is north of 20%. Meanwhile, the magnitude of the oil move on a year-over-year basis is only about half what we saw in the recession outcomes. In other words, the market isn’t pricing in a recession because the odds of that happening appear low.”
Looking closer at the market, Wilson says positioning tells him that investors were quick to price in risks.
“Defensive stocks and gold had a strong run from early January right up until tensions in the Middle East began at the end of February, but they have underperformed significantly since. Meanwhile, some of the better-performing sectors recently have been the more cyclical ones. That tells me the market got ahead of these concerns and may be ready to look past it sooner than most investors.”
All in all, the Morgan Stanley CIO believes that the worst of the correction is in the rearview mirror, and the stock market may be on the cusp of a new bull run.
“Bottom line, the market has already done a lot of the heavy lifting of this correction by discounting the war, higher oil prices, AI, and credit cards. What it’s wrestling with now is the risk of a monetary policy mistake with central banks staying too tight for too long. If that hawkish bent starts to ease, which it probably will if bond volatility rises much further, the resumption of the bull market is likely to arrive faster than most expect.”
Earlier this month, Wilson predicted that the S&P 500 would fall to 6,300 before potentially reversing its downtrend. As of Monday’s close, the S&P 500 is trading at 6,343.
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