Morgan Stanley’s top U.S. equity strategist Michael Wilson, one of Wall Street’s most prominent bears, is warming to the idea that the 2023 stock-market rally might have legs.
In a note shared with clients earlier this week, Wilson, who was one of only a handful of Wall Street strategists to anticipate 2022’s inflation-shock driven selloff, sketched out a scenario that could see U.S. stocks continue to climb.
According to his analysis, U.S. stocks are in a “policy-driven, late-cycle rally,” driven by fiscal stimulus in the form of strong government spending, a still-supportive liquidity backdrop supplied by the world’s largest central banks, along with “optimism that the Fed can now transition to easier monetary policy given the falling inflation data.”
Offering up a parallel, Wilson said the circumstances driving this year’s rally reminded him of 2019, when the Federal Reserve’s decision to shift from raising to cutting interest rates sparked a rally that only ended with the advent of the COVID-19 pandemic in early 2020.
See: Morgan Stanley’s Mike Wilson admits ‘we were wrong’ about 2023 stock-market rally, but refuses to throw in the towel
“The latest example of such a period occurred in 2019, but for somewhat different reasons — the Fed definitively paused and then cut rates and the Fed’s balance sheet began to expand toward the end of the year,” Wilson said.
“These developments fostered a robust rally in equities that was driven almost exclusively by multiple and not earnings, as has been the case this year.”
Growth stocks like the Magnificent Seven megacap technology names are leading the way in 2023, just like they did in 2019. In fact, the composition of the 2023 appears eerily similar to 2019, Wilson and his team noted, offering up a chart showing how technology-led growth — then as now — was in the front of the pack while defensive sectors like consumer staples trailed.
Wilson also addressed the notion that stocks might be “in a new cyclical upturn,” and offered a few examples of developments that might inspire him to turn bullish on the market.
“Others suggest we are in a new cyclical upturn. While we’re open-minded to this view eventually materializing, we’d like to see a broader swath of business cycle indicators inflect higher, breadth improve and front-end rates come down before adjusting our stance in this regard,” he said.
Treasury bills with lifespans of just a few months are still offering some of the most attractive yields in two decades, with the six-month bill yield at 5.485% on Wednesday, according to FactSet data.
Market breadth has improved lately as more stocks have advanced since the beginning of the summer. The S&P 500 equal-weighted index, which represents what the index would look like if each individual stock had the same influence over the index as whole, is up 8.1% in 2023, according to FactSet data.
That’s well below the 17.7% gain enjoyed by the S&P 500, which is weighted by market capitalization, meaning that the more valuable the company, the more influence it has over the index.
But there are signs this trend is beginning to shift. Over the past month, the equal-weighted S&P 500
XX:SP500EW
is up 2% compared with a roughly 1.5% gain for the traditional S&P 500
SPX.
U.S. stocks are on track to finish lower on Wednesday, with the S&P 500 down 1.4%, on track for its first daily drop of more than 1% since March 23, according to FactSet dat.
The Dow Jones Industrial Average
DJIA
fell by 324 points, or 0.9%, to 35,304. The Nasdaq Composite
COMP
fell by 309 points, or 1.4%, to 13,975.
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