Wall Street’s top strategist, who previously made a bearish prediction, now admits he was wrong as the markets are thriving like they did in 2019.
Wall Street's top strategist, who previously made a bearish prediction, now admits he was wrong as the markets are thriving like they did in 2019.
US Stocks: Is History Repeating Itself?
The US stock market is on a trajectory reminiscent of one of its best-performing years, 2019. According to Mike Wilson, Chief US Equity Strategist at Morgan Stanley, the S&P 500 Index is following a similar path to 2019, which handed investors a remarkable 29% return. So far, in 2023, the S&P 500 has already gained 20%, nearly matching the return it posted in 2019 during the same period 1.
Wilson’s observation presents an intriguing analogy and outlook for the market. He believes that the similarity between 2019 and the current market conditions suggests further upside potential for the index. However, he cautions that there are some differences to consider. In 2019, the Federal Reserve was already cutting interest rates, whereas in the present day, rates are on the rise. Additionally, the market multiple is already close to 1 turn higher than its peak during the 2019 period. Despite these factors, Wilson remains optimistic about the potential for index level gains from here 2.
While Wilson has been bullish on the market for 2023, he did admit in his weekly note that his predictions have not panned out as expected. However, he maintains a year-end target for the S&P 500 at 3,900, implying a 15% drop from its current level of around 4,590. He attributes the rally in equities to policy-driven factors and likens the current market conditions to the late-cycle rally witnessed in 2019, which was predominantly driven by multiples rather than earnings 3.
The Federal Reserve has been actively working to manage inflation and bring it down to its 2% target. As of last week, the Fed has raised borrowing costs for the 11th time since March 2022. However, signs of progress are starting to emerge. Recent data shows that the personal consumption price index, the Fed’s preferred inflation measure, experienced its smallest increase in more than two years. In addition, the employment cost index posted its slowest advance since 2021. These developments, coupled with traders pricing in a small chance of further interest rate hikes this year and the diminishing expectation of a recession, have fueled optimism for a soft landing and contributed to the market’s upward trajectory 4.
Although some Wall Street firms, including Deutsche Bank and Goldman Sachs Group Inc., have revised their predictions for an economic downturn, Wilson remains cautious. He believes that a broader range of business cycle indicators need to demonstrate an upward trend, breadth needs to improve, and front-end rates should come down for him to adjust his stance 5.
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In summary, US stocks are following a trajectory that echoes one of the best years for the S&P 500 Index, 2019. While there are similarities and positive indicators in the current market, there are also significant differences to consider. The Federal Reserve’s actions and the potential for future interest rate changes will heavily influence the market’s course. As always, investors should approach the market with caution and carefully weigh the various factors at play to make informed decisions.
With assistance from Sagarika Jaisinghani.
