(Bloomberg) -- The US stock plunge is vindicating some of Wall Street’s most prominent bears, who are doubling down with warnings about risks from an economic slowdown.
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Morgan Stanley’s Michael Wilson — among the most notable of pessimistic voices until last year — said investors were taking a more downbeat view on economic growth. Data last week “challenged the soft-landing view” held by some market participants, he wrote in a note.
“The bottom line is that the consumer has been weakening this year,” Wilson said. “The risk-reward for equities broadly remains unfavorable. At this stage, it’s hard to argue that many stocks are cheap if earnings revisions don’t turn around in a definitive manner.”
US equities have slumped in the early days of August, driven by tech, as investors worry the Federal Reserve has been too slow to cut interest rates in time to prevent a recession. Figures last week showed a slump in US manufacturing and a bigger-than-expected slowdown in hiring.
Wilson — whose bearish view played out in 2022 — has shied away this year from making big calls on the S&P 500 after his forecast didn’t materialize in 2023. The strategist had turned more optimistic on the index for mid-2025.
Meanwhile, the strategy team at JPMorgan Chase & Co. is among the last-standing high-profile bearish voices this year. Strategist Mislav Matejka said on Monday stocks were set to stay under pressure from weaker business activity, a drop in bond yields and a deteriorating earnings outlook.
“This doesn’t look like a ‘recovery’ backdrop that was hoped for,” Matejka wrote. “We stay cautious on equities, expecting the phase of ‘bad is bad’ to arrive,” he added. Stocks had tended to gain earlier this year on bets that weaker data would prompt Fed rate cuts.
At 4,200 points, the team holds the lowest year-end target for the S&P 500 among strategists tracked by Bloomberg. The forecast implies declines of another 21% from the index’s Friday close.
Still, their view stands in contrast to the bank’s trading desk, where John Schlegel, the head of positioning intelligence, said the rotation out of the technology sector might be “mostly done” and that “we’re getting close” to a tactical opportunity to buy the dip.
For now, the selloff was set to extend Monday, with contracts on the tech-heavy Nasdaq 100 sinking as much as 6.5%. The rout has also engulfed global equity markets. Against this backdrop, both Matejka and Wilson said they expect defensive sectors to outperform cyclicals, which are more sensitive to the economy.
A deteriorating earnings revision breadth — the spread between analyst upgrades and downgrades — is also dimming the outlook for stocks, the strategists said.
“The real question for equity investors is whether companies can deliver on what is now priced — i.e., accelerating growth in earnings with multiple years of expansion ahead,” Wilson wrote. “We remain skeptical on that front.”
--With assistance from Natalia Kniazhevich.
(Updates to add contrary view from JPMorgan’s trading desk)
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