Morgan Stanley’s Wilson Says Hawkish Fed Surprise to Roil Stocks

(Bloomberg) — Stock market investors holding on to hopes that the Federal Reserve will cut rates in the second half could be disappointed later this week, according to Morgan Stanley’s Michael Wilson — a staunch Wall Street bear.

Most Read from Bloomberg

The US central bank is expected to hike interest rates on Wednesday, marking the 10th consecutive increase going back to March of last year. “If the message delivered at this meeting is more hawkish, it could provide a near-term negative surprise for equities,” Wilson wrote in a note.

Bond markets are likely to pare back expectations for rate cuts later this year if Jerome Powell’s remarks warrant it, according to Wilson, who was ranked No. 1 in last year’s Institutional Investor survey after correctly predicting the selloff in stocks in 2022. “That could ultimately be a negative surprise for equities, particularly given the upside in index price we’ve seen into the FOMC and the fact that this meeting is one of the least talked about in recent memory,” he said.

The benchmark S&P 500 has climbed over the past two months even amid banking sector turmoil and recession concerns, as investors take comfort in better-than-feared earnings and expect any slowdown to be mild. Still, Wilson said hopes of a profit recovery in the second half of this year and throughout 2024 are overdone.

Fed Seen Boosting Rates Even as Economic Risks Build: Eco Week

Over at Goldman Sachs Group Inc., chief US equity strategist David Kostin said that even though this week will likely mark the end of the Fed hiking campaign, which was historically positive for stocks, the conclusion of this cycle may differ from the historical pattern.

“Rising valuations typically drive equity rallies at the end of hiking cycles, but the S&P 500 is already trading well above the multiple at the end of any cycle except the one ending in 2000, after which the S&P 500 declined despite the Fed pause,” Kostin said.