Morgan Stanley’s chief investment officer says the S&P 500 is headed to 7,800 in the coming months, but warns that a specific and lurking risk could send the market back to retest its recent lows at 6,316.
In a new RiskReversal Media interview, Mike Wilson lays out the timeline for Morgan Stanley’s S&P 500 target.
“7,800 is still our target. I feel confident about that. I don’t know if it’s on December 31st exactly, but within the next nine to 12 months, I think we’ll get there.”
While Wilson is bullish on the market’s trajectory, he says he’s keeping a close watch on an overlooked risk that will play out over the next few months.
Wilson says the most realistic threat to that outlook is not a geopolitical catastrophe but a liquidity crunch driven by a wall of corporate debt maturities. According to the Morgan Stanley CIO, companies have to refinance trillions of dollars in debt as soon as next year.
“I think the one that is realistic, that you can say is more than a tail risk, is that we are in this liquidity shortage right now… All the corporates that refinanced after Covid have a cost of capital that’s quite low. All that is coming due in the next two years, plus the Treasury issuance. And now the economy is using some liquidity.”
He adds that the transition to a new Federal Reserve chair compounds the risk, noting that markets tend to test incoming leadership with a bout of volatility.
“Every time you go through a transition, the markets get a little squabbly because they want to test that person. They want to see, ‘Okay, let’s see how they communicate. Let’s throw a little volatility at them and see how they manage.'”
Wilson singles out incoming Fed chair Kevin Warsh as a specific wildcard, flagging the possibility that Warsh could move to shrink the Fed’s balance sheet early in his tenure.
“The question around Kevin Warsh is, is he going to be a balance sheet hawk? I think he will be true to that. But I don’t know if he’ll do that right out of the chute. But I think that’s a risk, that maybe he decides that hey, we are going to try and do QT again. And that would be bad.”
Despite the risks, Wilson stops well short of calling for a major decline, framing any pullback as a retest rather than a breakdown.
“That’s not a 30% decline, by the way. That’s just like, ‘Okay, we could go retest the lows, probe down there again one more time at some point.’ That would be the main realistic thing that I could see right now. Otherwise, I think the lows are in.”
Photo by Dan Dennis on Unsplash
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