Bear Market Rally Could Carry Another 5% – Morgan Stanley’s Wilson

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Morgan Stanley’s Michael Wilson says the ongoing bear market rally could extend by another 5%.

The S&P 500 index soared nearly 2.5% on Friday to close the week 6.58% higher. This way, the U.S. benchmark index trades 9.13% off the lows set earlier this month.

For Wilson, the near-term target for the S&P 500 was 3800 and that was practically reached 2 weeks ago. In the meantime, the focus remains on PMIs, earnings revisions, and consumers.

“Higher inflation and slower growth are now the consensus view but that doesn’t mean it’s fully discounted. The more equity prices rise, the more hawkish the Fed will be. Meanwhile, falling PMIs suggest at least 10 percent downside while a recession would mean even greater risk. Sustainable rallies will require growth rates to bottom, something we don’t foresee until later this year,” Wilson told clients in a note.

The strategist reiterated his bearish stance despite a sharp move higher in some sectors, e.g. Consumer discretionary.

“We remain firmly in the bear market camp but relief rallies can happen at any time, and it appears we are now in the midst of one. Consumer discretionary stocks are exhibiting a strong tactical rally as shorts scramble to cover what has been one of the best one-way trades of the year. Not only is the sector the worst performer YTD (-25%) but it’s broken a 10-year uptrend relative to the S&P 500. In other words, we were due for a rally in the sector, but at the end of the day, we think it’s nothing more than a bear market rally that will eventually fade,” Wilson added.

Finally, the prominent strategist suggests it is way too early to believe the Fed will make a pivot.

“The bottom line is that inflation remains too high for the Fed’s liking and so whatever pivot investors might be hoping for will be too immaterial to change the downtrend in equity prices, in our view. However, that’s not to say it can’t get animal spirits moving higher in the short term,” Wilson added.