Morgan Stanley’s Wilson Sees Stock Rally at Risk of Yields Rise

(Bloomberg) — The rally in the S&P 500 has been driven by only a handful of stocks, putting the index at risk of fresh lows if bond yields rise, according to Morgan Stanley’s Michael Wilson — one of the most bearish voices on Wall Street.

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The percentage of stocks outperforming the S&P 500 on a three-month rolling basis is the lowest on record, Wilson said. That “is the market’s way of warning us we are far from out of the woods with this bear market,” the strategist — who was ranked No. 1 in last year’s Institutional Investor survey for correctly predicting the stock slump — wrote in a note.

The biggest risk could come from a slump in the technology sector if inflation proves sticky and bond yields rise, Wilson said. The tech-heavy Nasdaq 100 has surged 20% this year, partly as the sudden collapse of some regional US lenders sparked a rotation away from banking stocks and toward growth shares. Investors have also been betting that cooling inflation would prompt the Federal Reserve to stop hiking rates soon, but Wilson warned those expectations were premature.

“If there is one thing that can throw cold water on the large mega-cap rally, it’s higher yields due to a Fed that can’t stop hiking as soon as perhaps some investors are expecting,” Wilson wrote.

With the focus now turning to the first-quarter reporting season, the strategist said earnings forecasts remained “too optimistic” despite recent downgrades. He expects the pace of decline in estimates to “increase materially” over the next few quarters on disappointing revenue growth.