Traders Are Duped by Bear-Market Rally, Morgan Stanley’s Wilson Says

(Bloomberg) — Morgan Stanley’s chief US equity strategist isn’t convinced the stock rally is here to stay and strengthened his warning about a potential market downshift later this year.

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“We would characterize this as the bear market is continuing,” Mike Wilson told Bloomberg Surveillance Friday. “This is what bear markets do: they’re designed to fool you, confuse you, make you do things you don’t want to do, chase things at the wrong time and probably sell them at the wrong time.”

The S&P 500 Index is up more than 8% year-to-date, but has struggled to break out of its current trading range amid continued jitters over interest rates and a stalemate in US debt-ceiling negotiations. The gauge rose again Friday, hovering near the key 4,200 level.

Wilson has remained one of Wall Street’s biggest bears after accurately predicting the 2022 selloff, even as US equity indexes continue to climb this year. In his view, earnings expectations and economic uncertainties leave little reason for optimism positive momentum can continue.

“The fundamental case does not support where stocks are trading today whether it’s at the index level or at the single-stock level, and the second half is going to be choppier and probably downward in the index,” Wilson said.

Earlier on Friday, Bank of America Corp. strategist Michael Hartnett said investors are fleeing stocks for money market funds and bonds and sees another bout of risk-off trading in June. Global equities saw outflows of $3.9 billion in the week through May 24, a third straight week of redemptions that place year-to-date flows to the asset class flat for 2023, BofA said, citing EPFR Global data.

Some Wall Street voices, however, have softened their gloomy outlooks for US stocks. Citigroup Inc. global asset allocation strategists on Friday raised US stocks to neutral thanks to an expected boost from artificial intelligence, approaching peak rates, and economic resilience. BofA’s Savita Subramanian raised her S&P 500 year-end target to 4,300.

Meanwhile, Morgan Stanley Investment Management senior portfolio manager Andrew Slimmon struck a tone notably more optimistic tone than the bank’s house view as expressed by Wilson, saying in a phone interview that expectations for an earnings recovery in 2024 and the fear of missing out could drive the S&P 500 toward 4,600 by year end.

“With the exception of some very permanent bears who are digging in their heels, more and more people will begrudgingly raise their estimates,” Slimmon said.

–With assistance from Sagarika Jaisinghani, Jonathan Ferro and Tom Keene.

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