A decline of 10% in the benchmark S&P 500 stock index before the U.S. presidential election in November is “highly likely,” according to Morgan Stanley Chief Investment Officer Mike Wilson, reports Reuters.
Disappointing earnings results
In an interview with Bloomberg TV, Wilson cited uncertainty over the Federal Reserve’s interest rate policies and falling company pricing power as key factors increasing the likelihood of disappointing earnings results. Despite a 17% year-to-date gain in the S&P 500 driven by a few companies, Wilson noted rising price-to-earnings multiples and maintained a bearish outlook for the year. The S&P 500 closed Monday at 5,572, 3% above Wilson’s 12-month target price.
Wilson maintained a bearish outlook for the majority of this year, standing out as one of the few prominent forecasters with a pessimistic view. In late May, he lifted his base-case 12-month forecast for the S&P 500, estimating the fair value of the index at 5,400 points. At that time, this was only 2% above its level but 20% higher than his previous forecast of 4,500. Despite the recent gains, Wilson remains cautious.
The S&P 500 closed Monday at 5,572, some 3% above Wilson’s 12-month target price. This suggests that while there has been significant growth, the sustainability of this trend is questionable given the broader market dynamics.
Concerns Driving the Predicted Decline
Wilson outlined several concerns that support his prediction of a market decline:
- Federal Reserve’s Interest Rate Policies: The uncertainty regarding how quickly the Federal Reserve will reduce interest rates from their current near two-decade highs is a major factor. Higher interest rates generally lead to higher borrowing costs for companies, which can dampen investment and growth prospects.
- Falling Pricing Power: Many companies are losing their ability to maintain prices due to various economic pressures. This reduction in pricing power can lead to lower profit margins and, consequently, disappointing earnings results.
- Selective Market Growth: The significant gain in the S&P 500 has been largely driven by a handful of companies. This selective growth raises concerns about the overall health and sustainability of the market rally.
- Rising Valuations: The increase in price-to-earnings multiples suggests that stocks may be overvalued. When valuations are high, there is a greater risk of a market correction.
Did you subscribe to our daily Newsletter?
It’s Free! Click here to Subscribe
Source: Reuters
