Morgan Stanley warns of a likely downturn before US election in US markets

With the S&P 500 perched close to all-time highs, having logged a 17.5% gain this year, on top of a 24% jump last year, Morgan Stanley’s chief investment officer Mike Wilson has warned of a 10% correction over the next few months.

Why Morgan Stanley sees a fall

Wilson’s bearish outlook is driven by various factors:

Fed Uncertainty: What will be the determinants for decision making by the Federal Reserve? Will they cut rates twice as expected or can a different outcome put markets into uncertainty?

Earnings Disappointment: Companies may struggle to meet earnings expectations, especially with a potential slowdown in pricing power “The average company has not had good earnings results,” Wilson said. The third quarter tends to be fairly volatile for US companies and will be choppy, according to the Morgan Stanley CIO.

Overheated Valuations: That impressive gain so far this year for the S&P 500 seems unsustainable, as it has been led by a few companies and has led to inflated price/earnings multiples. “Valuations to me look very unexciting,” Wilson said.

A Lone bear among bulls

While Wilson maintains his bearish stance, much of Wall Street has been bullish on the market such that S&P still hits all time highs supported by expected Fed rate cuts and the hype surrounding artificial intelligence companies.

However, some cracks are starting to show.

• Goldman Sachs estimates that corporate earnings will lead to a two-week market downturn in August.
• JPMorgan is cautiously optimistic due to recent weakening economic data
• Citigroup warns of a possible pullback.

Silver linings in the clouds

Wilson also thinks there is a 20-25% chance of an upside for the market before year-end. He suggests focusing on high-quality, large-cap growth stocks with strong balance sheets and consistent earnings performance.

The Takeaway

On the whole, Wilson said he wouldn’t be too perturbed if the market indeed does fall 10%, “we’d probably be interested (high-quality growth names) again.