Michael Wilson, an analyst at Morgan Stanley who is known for being one of the most bearish strategists on all of Wall Street, said he expects markets to continue experiencing significant increases and thus continue their rebound after the panic to a more aggressive Fed.
Wilson pointed to the resistance seen last week by the S&P 500 200-day moving average, a widely-watched technical indicator of an index’s momentum against its current price. The rebound of the line suggests that now can act as support for the benchmark. Wilson said the index is likely to rise if Treasury yields and the dollar continue to fall.
“Stock markets survived a crucial test support last week which suggests this bear market rally is not yet ready to end,” the strategist wrote in a note on Monday.
The index ended a three-week losing streak on Friday as investors bet the Federal Reserve would not raise interest rates beyond already discounted peak levels. Wilson, who correctly predicted last year’s stock sell-off and October rally, sees the next resistance for the index stands at 4,150 points, around 2.5% above Friday’s closing level.
The strategist does not expect the rally to last long. He said markets have to fall further in the medium term as fundamentals continue to deteriorate, especially on the earnings front.
Despite the rebound, “we believe that it does not disprove the reward The very poor risk ratio that many stocks currently offer given valuations and earnings forecasts that remain too high, in our view,” Wilson said, expecting spreads to disappoint the current consensus “by a large amount.”
Wilson noted that the gap between reported earnings and cash flow is the widest in 25 years, driven by excess inventory and capitalized costs that have yet to be reflected.
Despite the dovish comments from the Federal Reserve bankers and the inflation data and persistently high employment, the S&P 500 is up 5.4% this year, while the tech benchmark Nasdaq 100 is up more than 12%. Wilson had recently warned that he expects a deterioration in fundamentals.
This situation is echoed at JPMorgan, where strategists led by Mislav Matejka advise investors to use recent gains as an opportunity to cut exposure.
Matejka is also particularly negative on US stocks, noting that relative valuations and earnings are near all-time highs, while they could “continue to undoing part of the strong streak generated in the last 10 years,” according to a note sent Monday.
No doubt others have an opposite view. At Wells Fargo, strategist Christopher Harvey is convinced that the stock market rally has more room. “Don’t negotiate like if we were in a bear market, because we’re not,” he wrote in a note Monday.
