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The Tell: U.S. stock market rebound will run out of steam, Wall Street’s most vocal bear says


Morgan Stanley’s Mike Wilson landed a career-defining call by warning clients, and anybody else who would listen, about the brutality that global stocks have faced this year.

Given this recent track record, and with U.S. stocks giving back some of last week’s rebound on Tuesday, it’s probably worth taking a look at what Wilson and his team are saying about the latest rebound in equities after the main U.S. benchmarks broke a historic losing streak last week. For the Dow Jones Industrial Average at least the eight week slide that ended last week was the longest since the administration of President Warren Harding.

According to Wilson, although higher inflation and slower economic growth are now the consensus view, this doesn’t mean either is fully priced into equities.

Wilson believes the S&P 500 index

could top out around 4,200 or just below its 50-day moving average before U.S. stocks embark on their next leg lower. For the Dow Jones Industrial Average
the 50-day moving average is around the 33,600 level, compared to 33,080 on Tuesday afternoon.

Of course, Wilson isn’t the only market strategist or technician to see the 50-day moving average as a ceiling of sorts for the current rebound in stocks. That level corresponds to the “danger zone” for stocks highlighted earlier by Jonathan Krinsky.

Wilson said growth scares that fall shy of a recession should bring the forward EPS for the S&P 500 index to $231, down from $238, prompting a selloff.

Wilson also blamed the mispricing of stocks in the last few days on misplaced optimism about the Federal Reserve’s policy outlook. He poured cold water on the popular notion of a September “pause” in raising interest rates, something MarketWatch has discussed in more detail here.

“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,” he added.

In the past, Wilson has said that the S&P 500 index could fall as low as 3,400 by the beginning of the fall. That would represent a drop of roughly 18% from current levels.

Recent movements in Treasury yields have prompted Morgan Stanley to revise its assessment of U.S. stocks’ fair value multiple to between 15 and 16 times earnings. But as of Tuesday the U.S. equity benchmark had a multiple of nearly 21x, while FactSet estimates put the expected multiple at year-end at 18.6.

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