Morgan Stanley's Wilson Warns of Dual Threats to U.S. Stock Growth Amid Seasonal Weakness

Morgan Stanley's Chief Investment Officer and Global Strategy Team Leader, Michael Wilson, recently stated that economic uncertainty and weak corporate earnings forecasts could impose a dual restriction on the growth of U.S. stocks.

In a recent report, Wilson mentioned that market participants are more focused on economic growth issues or optimistic sentiments fueled by policy support. However, there is no concrete evidence in the short term, indicating that the indices will fluctuate within a narrow range.

Wilson also pointed out that due to seasonal weakness, more analysts are likely to lower their profit estimates, outnumbering those who might raise their forecasts. This seasonal pattern is one of the reasons why the third quarter tends to be particularly challenging for the stock market.

According to his latest forecast, the S&P 500 index is expected to trade between 5000 and 5400 points in the short term. The upper limit of this range implies only a 1% growth from current levels, while the lower limit suggests a potential decline of 6.4%. As of last Friday's close on August 9, the S&P 500 was up 0.47% to 5344.16 points.

Over the past month, the market has taken a significant hit based on speculation that the Federal Reserve might be too slow in cutting rates to prevent a recession. Concerns about economic growth have also dimmed the otherwise optimistic second-quarter corporate earnings reports.

Within the last quarter, the average profit growth for companies in the S&P 500 index was 13%, the largest increase since 2021. However, the number of companies exceeding sales expectations was the lowest since 2019, exacerbating concerns about profit margin elasticity.

Last week, the S&P 500 managed to recover most of its losses, but it is still nearly 6% below the historical high set in mid-July.

Currently, all eyes are on the upcoming Consumer Price Index (CPI) report from the US Department of Labor, set to be released this Wednesday, August 14. Investors are seeking favorable signals for the stock market from this report.

Wilson further noted that while the bond market has started to price in the expectation that the Federal Reserve is "behind the curve," U.S. stock valuations have yet to fully reflect this risk.

He reiterated that if given the choice, he would favor defensive stocks with strong earnings prospects and robust balance sheets.