Stock Market Just Made The ‘Same Mistake Again’—Here’s Why Experts Are Worried About The Latest Rally

Topline

As stocks stage a comeback ahead of a critical inflation reading, Morgan Stanley’s investment chief is warning the market’s latest upswing is starting to resemble a bear market rally last summer that ultimately ushered in new lows for major indexes—particularly since earnings in the resurgent technology sector have been largely disappointing.

With hope for a Fed pivot now dwindling and earnings deteriorating further, the market is “about as … [+] disconnected from reality as it’s been during this bear market,” Morgan Stanley says.

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Key Facts

In a Monday morning note to clients, Morgan Stanley strategist Michael Wilson recalled how the S&P 500 rallied more than 15% last summer amid hopes the Federal Reserve would soon pivot on its aggressive policy meant to temper inflation—something officials still insist won’t happen anytime soon nearly a year later.

The S&P ultimately plunged more than 16% to a multiyear low in October as officials dashed hopes for a pivot, and Wilson on Monday warned it appears stocks “may have just made the same mistake again,” pointing out technology is again leading growth as it did last summer, despite hopes for a Fed policy change still seeming “premature.”

To make matters worse, earnings projections are now “much worse” than they were last year and have turned negative on an annual basis, with tech earnings in particular having “broadly disappointed,” and falling 13% this quarter—the worst annual growth rate since the Great Financial Crisis, the analysts note.

With hope for a Fed pivot now dwindling and earnings deteriorating further, the market is “about as disconnected from reality as it’s been during this bear market,” Wilson says, positing the S&P will fall 5% to end the year at 3,900 points, but could tumble as much as 14% to 3,500 if things get much worse.

What To Watch For

The Labor Department will report inflation for January on Tuesday morning. On average, economists project the consumer price index rose 6.2% on an annual basis—signaling a decline from 6.5% the month prior. Any more than that could suggest the Fed may have a harder time taming inflation than experts believe—a development that would likely further rattle markets.

Key Background

The stock market collapsed last year as the Fed’s interest rate hikes started to slow down the economy, effectively reversing a slew of outsize stock gains bolstered by government stimulus efforts during the pandemic. After skyrocketing 22% in 2021, the tech-heavy Nasdaq collapsed 33% in 2022, the S&P 9%. With inflation falling from 40-year highs this year, the Nasdaq and S&P are up 14% and 8%, respectively; however, Wilson and other experts have worried the rally could be a head fake, especially if inflation stops cooling down—or worse, ticks up again.

Contra

“Persistent economic concern and volatility continue to plague markets and threaten a second straight year of decline,” says Seema Shah, chief global strategist at Principal Asset Management. “Yet, while downturns can indeed be difficult, history shows that they are often shorter-lived than bull markets.” Shah points out bear markets since World War II have lasted 14 months on average, and resulted in a market decline of 36%. In contrast, the average bull market lasts nearly six years and returns 192%.

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Key Facts

What To Watch For

Key Background

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