The bear market rally is running out of stream, and it is time to take profits, says Morgan Stanley’s Wilson

“This makes the risk-reward of playing for more upside quite poor at this point, and we are now sellers again,” a team of strategists led by Wilson wrote in a Monday note. 

Wilson went from one of Wall Street’s most outspoken bears to a tactical bull in October, when he anticipated a December rally of U.S. equities with the S&P 500 reaching up to 4,150 points. However, as the large-cap index now trades near the bank’s original tactical target range of 4,000 to 4,150, the strategist said investors should consider taking profits and get prepared for the new bear-market lows. 

Wilson also said in November the S&P 500 will set a new price trough of 3,000 to 3,300 in the first quarter of 2023, before jumping back to the 3,900-level by the end of the year. 

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U.S. stocks fell on Monday after three major benchmarks on Friday posted a second straight week of gains. The S&P 500 on Monday was off 1.8%, ending at 3,998, while the Dow Jones Industrial Average
DJIA,
-1.40%
declined by 1.4% and the Nasdaq Composite
COMP,
-1.93%
slumped 1.9%. Stocks had soared last week after Federal Reserve Chairman Powell said the central bank’s pace of interest-rate increases can slow as soon as its December meeting.

From a very short-term perspective, Wilson and his team think the S&P 500 could achieve 4,150, or about 3.8% above current levels, “over the next week or so.” However, a break of recent intraday lows of 3,938 would provide some confirmation the bear market is ready to reassert the downtrend in earnest, Wilson said.

Morgan Stanley’s bearish call was echoed by other Wall Street banks. JP Morgan Chase & Co.’s Marko Kolanovic, once one of Wall Street’s most vocal bulls, called for equity prices to stumble early next year. He also argued that the rebound in stocks was overdone after October. Meanwhile, strategists at BofA Global Research said it is time to sell the stock-market rally ahead of a potential surge in the unemployment rate next year. 

Wilson recommends investors stay defensive in healthcare, staples and utilities as falling rates from here should be viewed as “a growth negative rather than valuation/Fed pause positive.” In addition, growth stocks are unlikely to benefit from falling rates because of the risk to corporate earnings, especially for tech and consumer-oriented companies, which are large weights in growth indices.