Top Wall Street strategist admits he was wrong about US stock plunge as S&P 500 nears recovery from 2022 decline.

Top Wall Street strategist admits he was wrong about US stock plunge as S&P 500 nears recovery from 2022 decline.

The Roller Coaster Ride of U.S. Equities: A Tale of Unpredictability and Resilience

Stock Market

Mike Wilson, the chief investment officer for Morgan Stanley, has been warning for months that the rally in U.S. equities is nothing but a mirage, even as stocks continue to rise. His predictions, however, have proven incorrect as the current rally shows remarkable durability, almost erasing all of last year’s decline. Wilson candidly admitted his mistake in a note to clients, stating, “We were wrong” and acknowledging that 2023 has been a story of higher valuations amid falling inflation and cost-cutting.

Just over a month ago, Wilson’s worst-case scenario predicted a potential 14% decline in the S&P 500 by June 2024. Back in mid-July, he warned that companies were still overvalued, with higher interest rates and decreasing liquidity putting pressure on stock prices, despite second-quarter earnings turning out “better than feared.” Nevertheless, Wilson and Morgan Stanley have since adjusted their forecast, now predicting the S&P 500 to settle at 4,200 by June 2024, just 8% below its current level.

However, caution remains in Wilson’s outlook. He remains pessimistic about 2023 earnings, especially as he expects inflation to fall even faster than the consensus anticipates. Wilson notes that companies have been able to increase prices due to high inflation, keeping sales growth above zero. However, as inflation recedes, companies will likely face challenges in maintaining high prices. In fact, more firms are downgrading profit forecasts than upgrading them, according to Morgan Stanley’s observations.

It is worth noting that Wilson’s reputation as a top stock strategist stems from his accurate prediction that U.S. equities would experience a decline in 2022, contrary to the consensus forecast of a slight rise. His worst-case scenario envisioned the S&P 500 reaching 4,000 by the end of the year due to interest rate hikes and slower economic growth. The index fared even worse and ended the year at 3,839, marking a significant 20% drop. However, the market has since rebounded, with the index showing a gain of over 19% in 2023 and hovering just around 5% below its record value recorded on January 3, 2022.

As investors eagerly await the quarterly earnings reports of around 170 S&P 500 companies, including tech giants like Microsoft, Meta, and Alphabet, there is potential for market volatility if weak forecasts are presented. Netflix, for example, experienced a decline of over 10% in its stock price after providing a revenue forecast below expectations for the coming quarter. Amidst the earnings reporting season, another significant event on investors’ radar is the Federal Reserve’s announcement on interest rates, scheduled for Wednesday. While most analysts predict a rate hike this month, market observers will be particularly attuned to the Fed’s signals regarding the continuation of hikes and the central bank’s assessment of the ongoing battle against inflation.

The roller coaster ride of U.S. equities continues, characterized by unpredictability and unexpected resilience. Investors buckle up as they navigate through the highs and lows, keeping a watchful eye on earnings reports and central bank decisions that can collectively sway market sentiments. The year 2023 has certainly been a remarkable one for U.S. equities, defying predictions and challenging the outlooks of even the most seasoned experts in the field.