One of Wall Street’s most prominent bears is now expecting gains in the US equity market to broaden into less loved corners than the big tech companies that have dominated the rally so far.
Morgan Stanley’s Mike Wilson, who stuck with his prediction of a stock market decline last year while the S&P 500 Index surged 24%, sees opportunities in names outside the so-called Magnificent 7 companies that have powered equity gains through much of 2023. He’s urging investors to buy high-quality, growth names that can generate pricing power.
“In the stock world, I think once again, it’s going to be idiosyncratic — I don’t think it’s going to be as narrow as last year,” Wilson said Tuesday afternoon at the iConnections Global Alts conference in Miami Beach. “The big index is full, it’s priced. For all intents and purposes, the value is not there. The value is underneath the market.”
Wilson’s comments come as momentum in Big Tech shows signs of fading after outsized gains last year. Nasdaq 100 futures are down almost 1% on Wednesday morning after Microsoft Corp. and Alphabet Inc. reported earnings showing artificial intelligence progress failing to meet investor expectations. Results from Meta Platforms Inc., Amazon.com Inc. and Apple Inc. are on deck this week. The companies, together with Nvidia Corp. and Tesla Inc., account for a record 29% of the S&P 500.
“I think it’s the Magnificent 4 now, and it is related to earnings,” Wilson said during a panel discussion at the conference. “Earnings for some of these companies are falling by the wayside. It’s getting harder even for some of those businesses because they can only do so much on the cost side price.”
The top-rated portfolio strategist added that the rally is going to see breadth improve, though specifying that “junky small caps” and businesses with weak balance sheets that need to refinance debt at higher normalized rates with the Federal Reserve still keeping monetary policy tight, will continue to falter. He emphasized that smaller, cyclical businesses with leverage remain down substantially over the past two years, even as the broader market has soared back to record highs, and he predicted that many venture capital investments are not being funded and will go to zero.
“That’s the tough love that Jerome Powell delivered,” Wilson said. “And that was necessary because we just had too much excess coming off the Covid boost.”
Wilson has softened his dour outlook in recent months after missing last year’s rally, but at 4,500, his 2024 S&P 500 year-end target still implies a drop of roughly 9% before the year is out. The average sell-side target tracked by Bloomberg stands at 4,874. The gauge closed Tuesday at 4,925. Wilson has struck a noticeable change in tone since December, when he said the Fed’s dovish policy shift was a “bullish outcome” for US stocks.
US equities have so far extended last year’s rally into 2024, with the S&P 500 building on a 24% advance as the economy remains robust and traders look ahead to potential rate cuts later this year. The index is on track to close January with a more than 3% gain.
Jefferies Financial Group Inc. chief market strategist David Zervos, who spoke alongside Wilson at Tuesday’s panel, said “whatever you were doing last year, you’re supposed to be dialing that risk up.”
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