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- Morgan Stanley’s stocks chief issued a wary outlook for stocks in 2024.
- Mike Wilson cited the market’s reliance on the “Magnificent Seven,” which face challenges next year.
Investors betting on the “Magnificent Seven” and interest-rate cuts lighting a fire under stocks next year are setting themselves up for disappointment, Morgan Stanley’s stocks chief has warned.
“We’re probably going to trade a lot lower during the next year than anybody’s imprinting right now,” Mike Wilson, the bank’s chief investment officer and chief US equity strategist, said during a recent episode of the “On The Tape” podcast.
The group of seven mega-cap growth stocks — Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, and Nvidia — have blown past the wider market this year, pulling the benchmark S&P 500 index into positive territory.
Wilson said that stocks appear overvalued based on their likely earnings next year, and the market’s gains this year have been concentrated among a handful of companies like Tesla and Nvidia. As a result, stocks present “a low-quality opportunity, a low risk-reward opportunity” in his view.
“It’s a difficult operating environment, the earnings picture’s pretty crummy, the macro environment is tenuous at best,” Wilson said. “The only thing really going for the market right now is that we’re at the end of the Fed hiking cycle.”
Wilson was referring to the Federal Reserve raising its benchmark interest rate from almost zero to over 5% since last spring in an effort to bring down historic inflation. Now that price growth has slowed to below 4% for several months, the central bank is widely expected to begin cutting rates next year. Lower rates typically encourage spending over saving and make borrowing cheaper, which tends to boost corporate earnings and lift stocks.
The veteran strategist struck a bearish tone on the “Magnificent Seven” companies that have led the market higher. Their earnings impressed this year relative to their disappointing figures last year, but they’ll face tougher comparisons in 2024, he said. Moreover, only Nvidia has seen a real acceleration of revenue growth this year, meaning the onus for the other six companies is likely to be on cutting costs to lift their profits in 2024.
The Wall Street heavyweight also emphasized that if the Federal Reserve does manage to crush inflation without dragging the US economy into recession, it will have limited scope to cut interest rates and boost stocks.
“The soft landing is probably the worst possible scenario for stocks,” Wilson said, arguing that rates would need to fall materially to reignite housing and automotive demand and allow the Treasury to borrow more cheaply.
Wilson also rolled his eyes at the idea that an economic contraction is now less likely than it was a year ago.
“Somehow the risk of recession today is lower than it was 10 or 12 months ago, which makes absolutely zero sense to me,” he said. A downturn only grows more likely as the US advances through the latter stages of its economic cycle, he noted.
Wilson admitted this summer that he’d underestimated the market, but he’s remained cautious on stocks regardless. In a recent note, he pointed out that late-stage rate cuts have historically had a muted effect on stocks, and compared the current market situation to 2006. In September, he warned a shock to the system could tank the S&P 500 by more than 25% to the low 3,000s.
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