Morgan Stanley's Chief Investment Officer Michael Wilson warned on Tuesday of an over-optimistic sentiment in the stock market, contrasting the recent Wall Street rally driven by expectations of a robust economy. Wilson voiced concerns about weaker than anticipated economic growth this year, particularly for consumer sectors.
In his note shared by Bloomberg, Wilson observed that the market, at its current prices, anticipates a significant re-acceleration in growth, which he believes is unlikely to occur this year. He further pointed out that softer data for September and October is not currently factored into many stocks and expectations.
Wilson's warning is echoed by other strategists such as Bank of America Corp (NYSE: BAC ).'s Michael Harnett and JPMorgan Chase & Co. (NYSE: JPM )'s Mislav Matejka. Harnett cautioned that US stocks could face a pullback due to the risk of a hard economic landing. Matejka warned of complacency in US stock sentiment, noting that there are no more safety nets to cushion equities.
Despite the bullish sentiment on Wall Street, fueled by expectations that the economy can withstand the Federal Reserve's hiking campaign and excitement around developments in artificial intelligence, Wilson remains skeptical. His skepticism stems from weak breadth in the S&P 500 and Nasdaq Composite , referring to the limited number of stocks contributing to the rally. Furthermore, he noted a weakening personal consumption expenditure as a reason for his team's skepticism about accelerating economic growth.
Wilson also expressed concern over the conflicting and uncertain economic data at this stage in the cycle. He noted that during such periods, price action tends to influence sentiment and positioning more than usual.
In terms of sector preferences, Wilson leans towards industrials and energy companies within cyclical stocks that benefit from economic growth. He advises avoiding consumer discretionary and small caps.
Earlier in August, Wilson had suggested that equities were in a "boom-bust" position due to fiscal policy allowing apparent economic growth, leading many to overlook the potential risk of recession.
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