Morgan Stanley Sees Near-Term US Stock Market Rally

(Bloomberg) — Morgan Stanley’s Michael Wilson, known for being one of Wall Street’s most bearish strategists, said he’s expecting stocks to rally in the short term.

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Wilson pointed to the S&P 500’s resilience at the 200-day moving average last week, a widely-monitored technical indicator of an index’s momentum against its current price. The bounce off the line suggests it may now act as a support for the benchmark. Wilson said the index is likely to move higher if Treasury yields and the dollar continue to decline.

“Equity markets survived a crucial test of support last week that suggests this bear market rally is not ready to end just yet,” the strategist wrote in a note Monday.

The index snapped a three-week losing streak Friday as investors bet that the Federal Reserve won’t raise interest rates beyond peak levels already priced in. Wilson — who correctly predicted the selloff in stocks last year and the rebound in October — sees the next resistance for index at 4,150 points — about 2.5% higher than Friday’s close.

The strategist doesn’t expect the rally to last long. He said markets have further to fall in the medium term, as fundamentals continue to deteriorate, especially on the earnings front.

Despite the rally, “we believe it does not refute the very poor risk reward currently offered by many stocks given valuations and earnings forecasts that remain way too high, in our view,” Wilson said, expecting margins to disappoint the current consensus “by a large amount.”

Wilson noted the gap between reported earnings and cash flow is the widest in 25 years, driven by excess inventory and capitalized costs that have yet to be reflected.

Morgan Stanley’s Wilson Says March Brings Bear-Market Risks

Despite hawkish comments from Federal Reserve officials and continued hot inflation and jobs data, the S&P 500 has risen 5.4% this year, while the technology benchmark Nasdaq 100 surged over 12%. Wilson has recently warned that he expects deteriorating fundamentals.

Such caution is echoed at JPMorgan Chase & Co., where strategists led by Mislav Matejka recommend investors use recent gains as an opportunity to trim exposure.

Matejka is also particularly negative on US equities, pointing out that relative valuations and earnings are near historic highs, while they could “keep unwinding some of the strong run that it delivered over the past 10 years,” according to a note on Monday.

To be sure, others take an opposing view. At Wells Fargo, strategist Christopher Harvey is convinced that the equity market bounce has further room. “Do not trade as if we’re in a bear market, because we are not,” he wrote in a note on Monday.

–With assistance from James Cone and Sagarika Jaisinghani.

(Adds Wells Fargo view in last paragraph)