- Stocks are still set to see earnings pressure, and investors shouldn’t be fooled by the tech rally, Morgan Stanley’s Mike Wilson said.
- Wilson said stocks now faced the highest downside risk in a year following the collapse of SVB.
- Previously, he predicted the worst earnings recession since 2008 to strike the market.
The downside risk to the stock market is the highest it’s been in a year, as firms are still set to battle earnings pressure amid tough economic conditions, according to Morgan Stanley’s chief stock strategist Mike Wilson.
In an interview with Bloomberg TV on Monday, Wilson pushed back against bullish market commentators who are championing the current rally in tech stocks. Though some investors are finding shelter in the tech sector amid the banking fears, firms are still set to face earnings pressure, he warned, which the market hasn’t yet fully priced in.
“The malinvestment was just so egregious and the overearning was even worse,” he said of tech stocks’ strong performance. “We think that risk for the equity market is elevated now more than it’s been in the last 6-12 months.”
Wilson has been bearish on stocks for months and previously sounded the alarm for the worst earnings recession since 2008 to hit the market. That’s because the Fed is set to keep interest rates high throughout 2023 — which weighs on stocks through a higher cost of borrowing — and firms likely haven’t cut costs enough yet to beat the headwinds, in his view.
That’s been worsened by the recent volatility stemming from the collapse of Silicon Valley Bank, which has sparked fears of more bank contagion and raised the risk of recession.
“Given the events of the past few weeks, we think guidance is looking more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes,” he said separately in a note on Monday.
The poor performance in low-quality and small-cap stocks indicates the final stretch of the bear market is around the corner, he added.
Previously, he described stocks as being in the “death zone” and predicted a 26% crash in stocks in the following months as the bear market comes to the end. His prognostications have been echoed by some other market bears, like “Dr. Doom” Nouriel Roubini, who predicted a 30% crash in stocks.