Morgan Stanley’s Wilson Says Too Much Optimism in Stock Prices

(Bloomberg) -- US equity investors are in for disappointment as economic growth is set to be weaker than expected this year, according to Morgan Stanley's staunch bear, Michael Wilson.

The strategist's warning contrasts with the rally on Wall Street, driven by expectations the economy can withstand the Federal Reserve's hiking campaign, which is seen as peaking soon. Tech stocks have outperformed on the excitement around developments in artificial intelligence.

“At current prices, markets are now expecting a meaningful re-acceleration in growth that we think is unlikely this year, especially for the consumer,” Wilson wrote in a note on Tuesday. “Potentially softer September and October data is not priced into many stocks and expectations.”

Last month, Wilson — whose negative outlook on stocks hasn't materialized yet this year — said the “risk-off complexion” of markets will last through fall and potentially winter. Some other strategists echo his bearish view, like Bank of America Corp.'s Michael Hartnett, who said US stocks still face a pullback from the risk of a hard economic landing. JPMorgan Chase & Co.'s Mislav Matejka said there is complacency in US stock sentiment, warning that there is no more safety net to cushion equities.

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In the Tuesday note, Wilson said breadth remains weak for the S&P 500 and Nasdaq Composite, referring to the number of stocks contributing to the rally, and the gains are not spreading. He also pointed to weakening personal consumption expenditure as a reason his team remains skeptical that economic growth is accelerating.

“The bottom line is that at this stage in the cycle, the economic data can be conflicting and uncertain for both the bulls and bears,” Wilson said. “During such periods, price action tends to influence sentiment and positioning more than normal.”

The strategist prefers industrials and energy companies within cyclical stocks that benefit from economic growth, while avoiding consumer discretionary and small caps.

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