(Bloomberg) — Traders should brace for a significant stock market pullback as uncertainty looms over the U.S. presidential campaign, corporate earnings and Federal Reserve policy, according to Mike Wilson of Morgan Stanley.
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“I think there’s a good chance of a 10% correction between now and the election,” Wilson said in an interview with Bloomberg Television on Monday. The third quarter “is going to be choppy.”
Read: Morgan Stanley’s Wilson Capitulates in the Face of Stock Drops See (1)
The S&P 500 opened the week at all-time highs and will hit its 35th record closing high this year if it ends in the green Monday. Expectations that the Fed will cut rates twice this year and enthusiasm over artificial intelligence have propelled the benchmark index to a 17% gain since January after rising 24% in 2023. Indeed, even a longtime bear like Wilson has moderated his tone compared with recent years.
But a growing number of Wall Street professionals are turning cautious heading into the seasonally turbulent third quarter, especially amid signs that the rally is overheating.
Goldman Sachs Group Inc.’s Scott Rubner said Monday he sees a tough two-week stretch starting in August if corporate results disappoint. Andrew Tyler of JPMorgan Chase & Co.’s trading desk said he was optimistic with “a little less conviction” because of recent weakness in economic data. And Citigroup Inc.’s Scott Chronert sounded the alarm about a potential pullback.
“Your probability of a move higher by the end of the year is very low, much lower than normal,” said Morgan Stanley’s Wilson, putting the odds of stock prices ending the year higher than they are now at 20% to 25%.
The strategist, whose bearish forecast for 2023 has failed to materialize, capitulated somewhat earlier this year, raising his target for the S&P 500 to 5,400 by mid-2025 from 4,500 in December. While the index has already surpassed that level, the change was dramatic because at the time, his forecast was among the lowest on Wall Street.
The bearish outlook has become dangerous for equity strategists as U.S. stocks continue to hit record highs. The relentless rally has already taken its toll on Wall Street’s most prominent skeptics, with Marko Kolanovic leaving JPMorgan last week.
“At the beginning of the year, we stopped being too pessimistic. But at the end of the day, it’s a tough situation,” Wilson said. “That’s not an excuse, that’s what we’re paid to do. Sometimes we do things right, sometimes we do things wrong. It doesn’t put any pressure on me to do my job any differently.”
“The way we get paid by institutional clients is to provide them with good analysis, a good framework, so they can make their decisions about how they should invest and that process will never change,” he added.
In that sense, Wilson believes investors shouldn’t be particularly concerned about a pullback from these levels. Instead, he believes it could create buying opportunities in the market. For now, he suggests focusing on individual stocks rather than indices.
Wilson and his team continue to recommend high-quality growth stocks and quality in general: large caps, companies with good balance sheets and those that can generate profits. The momentum will continue, but the problem is that it’s hard to find cheap stocks in those categories, he said.
“If they got to 10 percent, we’d probably be interested again,” he said.
—With assistance from Sonali Basak, Katie Greifeld, and Matthew Miller.
(Adds background on Wilson’s calls, details on Marko Kolanovic’s departure from JPMorgan.)
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