Morgan Stanley’s Mike Wilson, a Wall Street bear, believes the stock market’s ‘pivot rally’ may continue to rise.

Morgan Stanley's Mike Wilson, a Wall Street bear, believes the stock market's 'pivot rally' may continue to rise.

Markets Rally as Wall Street Gets Surprised

The current rally in stock market indexes has caught the attention of Wall Street, leaving many in disbelief. Despite initial pessimism, even the most steadfast bear, Morgan Stanley’s Mike Wilson, has been forced to revise his outlook. Wilson, highly regarded as the best portfolio strategist in the 2022 Institutional Investor survey, previously warned of a potential sharp decline in stocks, referring to them as being in the “death zone.” He also cautioned investors against being lured by the rising S&P 500 figures, asserting that it did not indicate a bull market. However, Wilson has now changed his tune and admits that 2023 seems to be mirroring the trajectory of 2019, one of the best years in a decade when stocks experienced a 29% rally.

According to a note seen by ANBLE, Wilson stated, “The data we have today suggests to us that we are in a policy-driven, late-cycle rally…optimism that the Fed can now transition to easier monetary policy given the falling inflation data.” He pointed out that while there are differences between 2019 and 2023, the past can provide insights into how much further the markets could rise. However, Wilson does not believe that the economy has entered a new cyclical upturn. He would need to see a broader range of business cycle indicators improving, along with lower front-end rates, to be convinced.

Even though Wilson has admitted that his previous predictions for 2023 were off-track, he still anticipates a drop in the S&P before the end of the year, with a year-end target of 3,900, around a 15% decline from its current trading level of approximately 4,590. Wilson also believes that this shift in optimism is making its way to American households, noting that consumers are becoming increasingly “optimistic” due to the resilient stock and labor markets.

Markets Set for New Heights

Jeremy Siegel, a professor at Wharton, shares Wilson’s newfound confidence. In his weekly analysis on investment research site Wisdom Tree, Professor Siegel stated that he has lowered the probability of a recession to below 50%, noting that if forced to give a probability, he would estimate around 30%. He expressed surprise at the 2.4% GDP figure reported for the second quarter, saying, “I don’t know any ANBLE who thought it would be that high.”

According to Professor Siegel, consumer sentiment remains strong, with “YOLO” spenders previously propping up the economy. The combination of factors suggests that although the U.S. does not have a booming economy, recent reports indicate a strong one. He added that the outlook for stocks and earnings is “good” and that “for now, it looks like the markets are bound to make new highs.” However, he did offer a warning for the technology sector, explaining that tech stocks are still expensive and could react to higher interest rates. Nevertheless, he noted that earnings have performed well in the current quarter.

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Optimism and a Good Outlook

The surprising rally in stock market indexes has led to a shift in sentiment among Wall Street analysts, with Wilson and Professor Siegel both revising their outlooks. Despite initial skepticism, the positive policy impact, strong fiscal impulse, and supportive global liquidity backdrop have contributed to the optimism. Consumers are also showing increased confidence thanks to the stock and labor markets’ resilience.

While Wilson still expects a drop in the S&P before year-end, Professor Siegel believes that the markets are on track to reach new highs. However, caution is advised within the technology sector due to potentially higher interest rates. Nevertheless, the overall outlook remains positive, with markets rallying and defying initial expectations, leaving Wall Street in awe.