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- The stock market isn't in for a year-end rally in 2023, Morgan Stanley's CIO Mike Wilson said.
- Mega-ca- stocks have tumbled after lackluster earnings, which has been pulling the S&P 500 lower.
- US companies and households face strong headwinds from high interest rates, clouding future earnings.
Investors hoping for a big rally to end the year after a stretch of weak performance for stocks might be disappointed.
According to Morgan Stanley's Mike Wilson, the market isn't likely to win back its gains from this summer. In a note to clients, the bank's chief stock strategist said he thinks the S&P 500 is likely to end the year at his long-standing target of 3900, about 6% lower than Monday's close of 4,166.82.
There are two reason for Wilson's downbeat forecast.
First, the macro outlook is souring despite strong data.
"The strength in the headline labor data masks the headwinds faced by the average company and household that the Fed can't address proactively," Wilson wrote.
The US has seen strong GDP growth and jobs data this month, which is masking pain felt by the average US company and household. As student loan repayments begin again, borrowing costs climb upwards, and loan delinquencies rise, those trends are painting a different picture of where the economy is headed.
Wilson's second reason: the S&P 500's super-fuel is running low as some of the biggest stocks slip after disappointing earnings. What's more, even firms that report decent results are seeing shares tick down after, Wilson note.
"Most of the mega-cap leaders that have reported so far have not traded well post their 3Q results," he wrote. "With this group unable to reverse the ongoing correction and keep the index above key technical levels, this is just another reason why a rally into year-end looks more unlikely to us."
He adds: "In another sign that this negative revision breadth is an early warning sign for 4Q and 2024 earnings, stocks are trading poorly after earnings reports whether they're good or bad."
Bears have argued that the market this year has broadly rallied on the backs of the "Magnificent Seven" stocks. Take them out, and the S&P 500 looks pretty different. With the S&P 500 propped up by just seven companies, many of which have dipped post-earnings, the benchmark index could struggle to gain momentum as the market heads into year-end.
"As we've noted, during late cycle periods, uncertainty is higher than average. As a result, price momentum often dictates investor opinion about the fundamentals and therefore one's confidence and positioning."