According to Morgan Stanley strategists, the stock market meltdown isn’t done yet, with room for both US and European shares to correct further as concerns about slowing growth intensify.
The S&P 500 is still mispriced for the current context of the Federal Reserve tightening policy into slowing growth, according to strategist Michael Wilson, who has long been a sceptic of the decade-long bull run in US stocks.
He predicts the S&P 500 to fall in the near term before climbing to 3,900 points next spring, which is still about 2.5 percent below current levels, based on slowing profits growth and higher volatility, according to his “fire and ice” scenario.
Wilson wrote in a report on Tuesday, “We continue to feel that the US equity market is not priced for this deceleration in growth from current levels.” “Over the next 12 months, we expect equity volatility to stay elevated.” He advises taking a defensive position in health care, utilities, and real estate stocks.
The call from one of Wall Street’s most outspoken bears contrasts sharply with some strategists, including Goldman Sachs Group Inc.’s Peter Oppenheimer, who said on Tuesday that the recent stock selloff had created buying opportunities, with headwinds like inflation and hawkish central banks already priced in. US shares rose marginally on Tuesday after ending their biggest weekly losing run since 2011, and futures pointed to more gains today ahead of a critical inflation data.
However, Berenberg strategists were cautious, adding that while buying the dip is “tempting,” US stocks remain expensive due to margin concerns.
Before reaching a historically crucial technical support level, the S&P 500 may face more fall toward 3,600 points, down 10% from Tuesday’s close. With the exception of the tech boom and the global financial crisis, the 200-week moving average has seen the US benchmark bounce back throughout all significant bear markets since 1986.
In Europe, Morgan Stanley’s Graham Secker is concerned about the region’s stocks, expecting them to decline further due to the difficult economic environment, the crisis in Ukraine, and the likelihood of profit downgrades in the second half of the year due to declining margins.
“Let’s keep it simple – the macro backdrop is very difficult for stocks,” Secker said in a letter on Wednesday, adding that the biggest bear case risk was a fall in Russian gas imports. “Despite poor investor mood and decent equity values, the challenging underlying picture is likely to pull stocks lower in the coming months.”
Secker downgraded European mining, construction, and materials companies to neutral, saying it’s “too soon” to reintroduce cyclical exposure to portfolios, while raising food, beverage, and tobacco stocks to neutral. Morgan Stanley strategists are overweight the FTSE 100 and prefer defensives over cyclicals, with a defensive tilt. They are overweight value against growth stocks.
Markets in Europe are also becoming more defensive as GDP slows and monetary policy becomes more hawkish, according to Barclays Plc strategists.