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Prominent Morgan Stanley analyst Michael Wilson is getting more bullish about stocks.
Morgan Stanley’s chief U.S. equity strategist in a Monday research note, along with a team that includes Adam Virgadamo, Andrew Pauker and Michelle Weaver, doubled down on their enthusiasm for equities in the aftermath of the pandemic that has rocked global markets and economies.
The Morgan Stanley team says that they have grown more optimistic about the outlook for equities because of the seemingly unfettered support being displayed by the Federal Reserve, which last week set up new loan programs, including offering to purchase high-yield bonds, and bolstered existing ones in an effort to provide $2.3 trillion in support for the economy essentially shut down due to COVID-19.
The central bank moved in mid-March to expand its balance sheet, ramping up purchases of Treasurys and mortgage-backed securities as Treasurys reeled from forced selling by traders and investors taking hits on other positions
“Don’t fight the Fed. The Fed surprised again last week, this time offering up to $2.3T in loan support while moving further down the quality curve with their secondary market purchases pushing into high yield,” wrote the bank researcher team. “This move is in-line with our prior view that investors should have no doubt about the Fed’s resolve to do whatever it takes to make sure the recession does not turn into a depression,” Wilson and company wrote.
The Morgan Stanley analysts lifted their base-case year-end scenario for the market to 3,000 from 2.700, with a bull case target at 3,250 from 3,000. “Our target increases are purely a reflection of higher multiples resulting from a faster and fuller normalization of the equity risk premium,” they said.
At last check Monday afternoon, the Dow Jones Industrial Average DJIA, -1.80% was down 533 points, or 2.3%, at 23,183.55, the S&P 500 index SPX, -1.47% was off 2% at 2,734, while the Nasdaq Composite Index COMP, -0.28% was down 0.9% at 8.082.
Wilson and his team have been fairly upbeat about the outlook for the markets compared against other Wall Street analysts, despite concerns that the deadly pandemic will wreak havoc on the economy and create recessionary slowdown in the market.
Investors are worried that the contagion that has infected more than 1.8 million people world-wide and killed about 118,000 people, according to data compiled by Johns Hopkins University, could have a longer-than-expected impact on corporate results.
Although, Wilson’s group contends that a pullback after a strong showing for stocks in last week’s holiday-shortened trade is likely, he believes that it will be shallower than many predict, bringing the S&P 500 to around 2,550 or 2,650, well off the 2,237 low that the broad-market put in on March 23.
A number of bearish strategists and investors have contended that the rebound off the March 23 lows has gone too far, too fast and that a retest of the downside will likely come as companies continue to downgrade or suspend their outlooks.
Some bears are changing their tune, including Goldman Sachs analyst David Kostin, who concluded in a Monday research note that the worst for stocks may, indeed, be over.
A “previous near-term downside of 2000 [for the S&P 500] is no longer likely. Our year-end S&P 500 target remains 3000 (+8%),” wrote Goldman.
In July 2018, Wilson predicted that the market would see its largest correction in months, with the rally showing signs of “exhaustion.” He wrote then: “The bottom line for us is that we think the selling has just begun and this correction will be biggest since the one we experienced in February.”
