(Bloomberg) — Traders should prepare for a bigger sell-off in the stock market amid uncertainty surrounding the U.S. presidential election, corporate earnings and Federal Reserve policy, Morgan Stanley’s Mike Wilson said.
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“I think it’s very likely we’ll see a 10% correction between now and the election,” Wilson said in an interview on Bloomberg TV on Monday. The third quarter “is going to be volatile.”
Read: Morgan Stanley’s Wilson succumbs to bears (1)
The S&P 500 index started the week at an all-time high and, if it finishes in the positive on Monday, it will set its 35th record closing price this year. The index has risen 17% since January after a 24% rally into 2023 on expectations that the Fed will cut interest rates twice this year and hopes for artificial intelligence. Indeed, even Wilson, a longtime bear, has softened his tone in recent years.
But a growing number of Wall Street pros are becoming cautious heading into the third quarter, a seasonally volatile period, especially amid signs that the stock rally is overheating.
Goldman Sachs Group Inc.’s Scott Rabner said Monday he expects the first two weeks of August to be tough if corporate earnings disappoint. Andrew Tyler of JPMorgan Chase & Co.’s trading desk said he remains bullish, though the recent weakening economic data has “dimmed my conviction a little bit.” And Citigroup Inc.’s Scott Kronert has warned of a possible selloff in stocks.
“The likelihood of stocks rising between now and the end of the year is very low, much lower than normal,” Morgan Stanley’s Wilson said, adding that there is a 20% to 25% chance that stocks will end the year higher.
After his bearish outlook for 2023 failed to materialize, the strategist capitulated somewhat earlier this year, raising his target for the S&P 500 from 4,500 points by December to 5,400 points by mid-2025. The index has already surpassed that level, but the shift was dramatic because his forecast at the time was among the lowest on Wall Street.
Bearish views have become dangerous for equity strategists as U.S. stocks continue to break records. The relentless rise in stock prices prompted one of Wall Street’s most prominent skeptics, Marko Kolanovic, to leave JPMorgan last week.
“At the beginning of the year, we tried not to take too soft a stance, but at the end of the day, this is a hard job,” Wilson said. “That’s not an excuse, that’s what we get paid to do. Sometimes we’ll get it right, and sometimes we’ll get it wrong. But we don’t feel pressured to change the way we do our jobs.”
“The way we get paid by our institutional clients is to provide them with the right analysis and the right framework to help them make decisions about how they should invest. That process will never change,” he added.
In that sense, Wilson doesn’t think investors should be particularly worried about a pullback from these levels. Rather, he said, it could create an opportunity to get into the market. For now, he suggests focusing on individual stocks rather than indexes.
Wilson and his team continue to recommend high-quality growth stocks, and high-quality stocks in general: large-cap stocks, companies with good balance sheets and companies that can grow earnings. The momentum will continue, but the problem is that it’s hard to find undervalued stocks in these categories, he said.
“If we get 10% in, we’ll probably get interested again,” he said.
–With assistance from Sonali Basak, Katie Greifeld, and Matthew Miller.
(Adds details about background to Wilson’s call, Marko Kolanovic’s departure from JPMorgan.)
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