One of Wall Street’s biggest bears is standing by his call for the S&P 500 index to finish 2023 at 3,900. That would represent a more than 10% drop from current levels.
In his latest note to clients shared with MarketWatch on Monday, Morgan Stanley’s U.S. equity strategist Michael Wilson rattled off a list of reasons why he thinks the turnaround in stocks that started in early August likely isn’t finished yet. Since markets opened on Aug. 1, the S&P 500 has fallen 4.4% through Monday’s close, according to FactSet data. However, the index remains up 13.9%, according to FactSet data.
Market breadth remains abysmal. Consumer confidence as reflected by survey data produced by the University of Michigan is waning. And equity analysts on Wall Street have begun to slightly temper their expectations for corporate earnings growth in the quarters and year ahead, Wilson said, even as optimism builds about the third-quarter earnings season that has just begun.
Technical factors also played into his reasoning. Wilson noted that the S&P 500 appears “stuck” between two key support and resistance levels: it’s 50-day moving average at roughly 4,420 and its 200-day moving average at roughly 4,240.
Whichever way the index ultimately breaks, Wilson noted that Morgan Stanley’s clients still expect the market to rally in the fourth quarter. Many are clinging to the notion that stocks historically have rallied during the fourth quarter.
MORGAN STANLEY
However, this optimism could be easily shaken, sparking another round of selling which could feed on itself as portfolio managers scramble to lock in year-to-date gains.
“Our sense from speaking with investors is that a majority still believe a 4Q rally is more likely than not. While that confidence level may have waned a bit this past week, many are still leaning more long than they would like to reduce the probability of missing out in a year in which narrow mega cap strength has driven benchmarks,” Wilson said.
“As mentioned above, this sentiment is contingent on price holding up in the short term; if it doesn’t, we could see positioning quickly shift to locking in profits and/or relative performance into year-end.”
Although the S&P 500’s technical setup appears healthy enough, beneath the surface, the situation for the average stock included in the index looks much more dire. That’s one reason Wilson is skeptical of the notion that U.S. stocks have entered a new bull market.
See: Stocks hit a bear-market low 1 year ago. Time to celebrate?
“…[A] more holistic view of the YTD price action suggests this is likely not a new
bull market/cyclical impulse with the S&P 500 Equal Weight Index and Russell 2000
down on the year and closer to the bear market lows last year than the bull market highs in 2021,” Wilson said.
“The high in July for the average stock is looking like a classic double top, at least
tactically. Furthermore, with only 39% of S&P 500 stocks above their 200-day moving average, it’s no wonder it has been a challenging year in terms of keeping up with the high quality large cap benchmark influenced so heavily by the handful of mega cap outperformers—a group that is also seeing a narrowing in leadership and fading of momentum.”
To wit, the average S&P 500 stock is down year-to-date based on the performance of the equal-weighted S&P 500 index. The equal-weighted index also recently endured a “death cross” as its 50-day moving average dipped below its 200-day moving average, signaling that momentum could continue to carry it lower.
MORGAN STANLEY
Breadth for both S&P 500 and the Nasdaq has broken down as well, while the percentage of stocks below their 200-day moving averages has continued to deteriorate.
MORGAN STANLEY
To be sure, Wilson isn’t the only bear who is concerned about weak performance outside of the market-leading technology stocks and the energy sector which has benefited over the past couple of months from rising oil prices.
Jonathan Krinsky, chief market technician at BTIG, highlighted the fact that the S&P 500 excluding the “Magnificent Seven” megacap technology names recently touched its lowest level of the year, while the ratio of the S&P 500 excluding the Mag Seven vs. the entire index has fallen to its lowest level since late 2021.
BTIG
Wilson has stood by his 3,900 year-end target all year even as the S&P 500 climbed roughly 20% to its 2023 highs in late July. Although he did acknowledge over the summer that his bearish call hadn’t panned out. Wilson earned plaudits in 2022 for anticipating the inflation-driven selloff that led to the worst year for stocks since 2008.
U.S. stocks looked set to open lower on Tuesday as Treasury yields continued to climb. The yield on the 30-year Treasury bond
BX:TMUBMUSD30Y
was nearing 5%, while S&P 500 index futures
ES00,
were down 0.6%.
