Morgan Stanley's Wilson Expects S&P 500 to Hit 3400 by End of Q2 Earning Season, Says Fed Put is Below 3500

May 23, 2022 6:44 AM EDT
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Morgan Stanley’s top US equity strategist Michael Wilson, who correctly predicted this year’s selloff, argues it’s too early to become more bullish on US equities.

Wilson continues to see the risks to growth, such as the consumer’s ability and willingness to spend, margin pressure, and a cyclical downturn for tech spending, he told clients in a note.

“De-rating is now a consensus view but the magnitude is still up for debate. We lowered our target P/E on both a normalized (16.5x) and short term (14.5x) basis given the risk to earnings growth that is more visible and less deniable, particularly for consumer and technology oriented companies. Energy is now the most favored sector by generalists,and inflation expectations remain high,” Wilson said in a client note.

The strategist sees the Fed “put”, the level where the central bank will take action to begin supporting asset markets, is below 3500.

“While sentiment and positioning for active institutional investors is low, asset owner clients remain heavily exposed to equities. As they reallocate, this should further weigh on equity prices. We think 3400 is a level that more accurately reflects the earnings risk ahead and expect that level to be achieved by the end of 2Q earnings season. Until then, vicious bear market rallies should be used to lighten up on the areas most vulnerable to the oncoming earnings reset.”

A new risk that emerged during the ongoing earnings season is excess inventory.

“While we think the margin pressure and waning low end consumer demand dynamics have been largely understood by the market, we think the excess inventory element and the associated risk to pricing is less understood and is just now beginning to be reflected in stock prices,” Wilson added.

Finally, Morgan Stanley’s survey of US consumers showed they are feeling the effects of the very high level of inflation. As much as 62% said that inflation is their number one concern for this year.

“More than half of consumers are planning to cut back on spending over the next 6 months due to inflation and an even higher share of lower income consumers are expecting to reduce spending. The majority of these cuts are expected to come from highly discretionary categories including dining out and footwear/apparel,” Wilson concluded.

By Senad Karaahmetovic

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