17.08.2022 – Wall Street has recovered nicely in recent weeks. But the next downturn is bound to come. At least that’s what one of the most precise analysts on the stock market says: clear the stage for Michael Wilson from Morgan Stanley.
If our expert is right, then US stocks are facing a new downturn. At the same time, the SPX in the daily chart has just reached the 200-day line and has already left the 50-line far behind.
Source: Bernstein Bank GmbH
And with that, we look at the details from Morgan Stanley. Wilson just warned that the rally that has been going on since June is just a pause in the bear market. Soon it is likely to go downhill again. The reasons: rising costs, falling profits, rising interest rates, a slowdown in the economy.
Q2 surprise
Incidentally, the recent rally also surprised Wilson, who explained it with better-than-expected second-quarter results. We add: Walmart just provided an example – the retail giant raised its downwardly revised full-year earnings expectations from minus 11 to 13 percent to minus 9 to 11 percent.
The expert went on to explain that the market had been betting on a pause in the interest rate hike cycle by the Federal Reserve and had priced in a brake on tightening in advance. The problem is that the Fed may not pause at all. In addition, valuations on the stock market are disconnected from economic reality. The ISM Report On Business Manufacturing and Services points to a sharp downturn in the economy. We add: In fact, the market is currently reinterpreting bad news to mean that it will keep the Fed from raising rates further. This is what happened with the sharp downturn in New York’s manufacturing sector – where the worst data since 2001 just came in.
Too much false Fed hope
Wilson went on to say, however, that inflation is not declining fast enough to prompt the Fed to pause its tightening cycle. The strong labor market report in July supported that thesis, he said. The expert concluded: “the equity market has already discounted a durable Fed pause, the likelihood of which is low to begin with. That development leaves equity multiples significantly disconnected from fundamentals, which continue to suggest we’re in a late cycle, slowing growth environment.”
1,000 points downside potential
All told, he said, the S&P 500 is overvalued by 750 to 1,000 points. And what could cause the market to turn lower again? According to Wilson, it is likely to be disappointments in earnings. He said cost pressures remain high, wage spirals are rising and demand is weakening. It won’t be long before a wave of corrections in earnings expectations sets in. However, the market still has some room for improvement.
Our Bottom Line: We are curious to see whether these forecasts come true. And we point out that a whole series of crises are still smoldering, which could affect the stock market: Taiwan, Ukraine, oil and gas prices. But if the Fed does put tightening on hold and calm prevails in the conflict hotspots, the bulls could recharge their batteries. Whether long or short – Bernstein Bank wishes you good luck with your trades and investments!
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