August 11, 2023
‘We Were Wrong’: Morgan Stanley’s Wilson Offers Stocks Mea Culpa.
We have disagreed with Morgan Stanley many times over the last 12 months, but the fact is, you don’t get the headlines, if you don’t make bold statements.
Mike Wilson is a bold statement kind of guy, but the sad truth is, Morgan Stanley shouldn’t be looking for headlines.
It’s just a thing of the new news world and the age we live in, if you go for the middle ground (which is right nearly all of the time), you don’t get any recognition because it’s just too boring.
The fact is, we agree with Mike, but his timing was wrong. High-interest rates are an issue, and inflation is an issue, but as we’ve seen over the last 2 years, it takes longer than you think for problems to filter through.
The problem with calling a drop in the market, is they happen when you don’t expect them, not when you do. The current economic climate is about to take a turn for the worse, but it won’t happen until it’s too late. That’s how it works.
To claim anyone knows when to sell, or when a collapse is coming, is just plain wrong. Obviously, we all know AFTER it’s happened, but as we always say ‘hindsight is the best trader of all’.
Last year’s plunge in the S&P 500 made Uber bear Mike Wilson the most celebrated stock forecaster on Wall Street. It’s a role he has failed to reprise in 2023.
The chief US equity strategist for Morgan Stanley on Monday conceded that he stuck with the pessimism for too long amid a rebound that has left equity benchmarks within spitting distance of erasing last year’s decline.
His forecast for the S&P 500 remains at 3,900, a level that has been left behind in the index’s 19% jump to around 4,560.
“We were wrong,” Wilson wrote in a note to clients Monday. “2023 has been a story of higher valuations than we expected amid falling inflation and cost-cutting.” His team recently shifted the focus to June 2024, for which the price target is 4,200, about 8% below its current level.
Wilson has spent most of 2023 warning the rally would reverse itself, sounding alarms on technology shares and arguing that March’s banking turmoil portended a “vicious” selling climax that was needed before shares could start rising again.
Seven months in, the benchmark index has mounted a strong rally despite falling profits. A litany of tailwinds, from optimism around artificial intelligence that lifted tech mega-caps to a resilient economy where inflation cooled and recession warnings proved premature, has propelled the surge.
Wilson is among the majority of Wall Street prognosticators who have missed the equity rally. Some of them are now scrambling to raise their price targets.
While acknowledging his mistake in underestimating the equity rally, Wilson remains cautious on corporate America’s earnings power. While softening inflation bolsters optimism for a more friendly Federal Reserve, a favourable backdrop for equity valuations, it also means waning pricing power for businesses.
Two weeks into the reporting season, profit downgrades are outpacing upgrades, with Morgan Stanley’s measure of earnings revisions breadth dipping back to negative territory.
“We remain pessimistic on 2023 earnings,” Wilson said. “Inflation is now falling even faster than the consensus expects, especially the inflation received by companies. With price being the main factor that has held sales growth above zero for many companies this year, it would be a material headwind if that pricing power were to roll over.”
At TPP we wouldn’t actually disagree with Morgan Stanley at this point. As we said, we just think he went too early. Things take time to filter through the system. Economies around the world seem to have remained unscathed by high-interest rates. This cannot and won’t last. Exactly what will happen is unknown, but we would say will happen………..is something, and it’s not something good.
The only solution is interest rates dropping before the consequences are really felt (and this could happen) OR, what Mike Wilson is suggesting could happen, will happen. We don’t think it will be a major correction, but it is certainly odd to suggest that stocks anywhere in the world right now could be on their all-time highs.
Most fund managers have missed the rally. They’ll miss the drop. Then they’ll miss the rally again, but that’s because they aren’t traders. They’re simply guardians of wealth who do very little to earn you more. If you truly want more, the TPP is the answer.
“TPP might just be about to revolutionise investment for the retail market.”
- London Stock Exchange 2020