Morgan Stanley Analyst Predicts Sustained Bullish Trend for US Stocks Similar to 2019 Rally

Morgan Stanley strategist Michael Wilson, known for his bearish stance throughout 2023, has now turned optimistic about the current trajectory of US stocks. Comparing the ongoing rally to the memorable surge of 2019, which saw the S&P 500 Index deliver an impressive 29% return, Wilson suggests that the market may have more upside potential ahead. So far this year, the S&P 500 has already climbed 20%, echoing the performance of 2019 over the same period.

The 2019 analogy indicates the possibility of further index gains, according to Wilson's note to clients. However, he cautiously points out that there are key differences between the two periods. Notably, the Federal Reserve was already implementing interest rate cuts during 2019, whereas the current market multiple is already approaching a level one turn higher than its peak during that period.

Acknowledging his previous miscalculation for 2023, Wilson maintains his year-end target for the S&P 500 at 3,900. This prediction implies a 15% drop from the index's current level of approximately 4,590.

Describing the current market rally as policy-driven and late-cycle, Wilson points to historical examples, such as the 2019 rally, where the Fed's decision to pause interest rate hikes and ultimately cut rates resulted in a strong equity surge primarily driven by multiple expansion rather than earnings growth.

The Federal Reserve's recent rate hike, the 11th increase since March 2022, aims to address inflation and steer it towards its 2% target. Encouragingly, released data indicates progress, with the Fed's preferred inflation measure, the personal consumption price index, experiencing its smallest increase in over two years, and the employment cost index showing its slowest advance since 2021.

Traders are presently pricing in limited chances of further rate hikes this year, with expectations of rate cuts likely to begin in early 2024.

Furthermore, the optimistic sentiment surrounding the US stock market is supported by the Fed economists' belief that the country is unlikely to experience a recession in 2023. This sense of a "soft landing" has been instrumental in propelling US stocks higher this year. Notably, leading financial institutions, including Deutsche Bank and Goldman Sachs Group Inc., have also revised their predictions, easing concerns of an imminent economic downturn.

While Wilson has embraced a more positive outlook, he remains cautious and calls for broader positive signals in various business cycle indicators, improved breadth, and declining front-end rates before fully adjusting his stance.

As market participants eagerly watch for further developments, the trajectory of the US stock market in the coming months remains uncertain but holds potential for continued growth.

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