Wall Street’s Mike Wilson warns stocks face ‘death zone’
Investors have their heads in the clouds — or buried in the sand — and are running out of time to salvage their returns before risking a “catastrophic” end, a Morgan Stanley strategist has warned.
Mike Wilson’s bleak prediction comes as the S&P 500 continues to rally, up 16% from its October lows and 6% since the beginning of this year. Morgan Stanley’s chief investment officer was voted the #1 equity strategist in an October poll Institutional Investorbased on a comparison by Jon Krakauer ‘In thin air‘ which details the tragic true story of three different expeditions attempting to scale Mount Everest when the summit was claiming its worst death toll in a single season.
Wilson argued that the benchmark stock index finds itself in the financial equivalent of the “death zone,” a term mountaineers use to refer to altitudes where there is insufficient oxygen to support human life for an extended period of time .
“Either voluntarily or out of necessity, investors have once again tracked stock prices to dizzying heights as liquidity (bottlenecks) allows them to rise to a region where they know they shouldn’t go and can’t live very long,” wrote Wilson. accordingly market observation. “They climb in search of the ultimate topping out of greed, believing they can ascend without catastrophic consequences. But eventually the oxygen runs out and those who ignore the risks get hurt.”
By Wilson’s estimate, the S&P 500’s price-to-earnings multiple has already jumped to 18 late last year, from just 15 in October. He believes the index has now reached levels where the air is thinnest since the bull market began in 2009, with the P/E currently standing at 18.6.
Rather than taking rising valuations as a sign that “the air is getting thinner” and they may be out in the cold, Wilson said investors have taken an “even more dangerous” path by betting on the most speculative stocks.
Warnings become reality
Wilson is no stranger to his doomsday predictions coming true. The confident bear correctly predicted last year’s sell-off as US stocks posted their worst performance since the global financial crisis.
Earlier this month, Wilson issued another bearish outlook, warning that the stock market would bottom this spring before recovering in the second half of the year. Even after the late recovery, the S&P 500 will still post negligible gains for this year, he predicted, closing at 3,900 points from a December 2022 close of 3,839.
In his report, he cautioned against optimism based on a pause in the Fed’s rate-hiking cycle, and confidence in a soft landing for the US economy will prove to be a mere illusion, backed by $6 trillion in fresh liquidity surging global Central banks have pumped into the economy since October.
“As investors reached even higher levels, they’re now talking about a no-landing scenario — whatever that means,” he wrote. “These are the tricks the Death Zone plays on the mind – you start seeing things and believing in things that don’t exist.”
Learn how to navigate and build trust in your organization with The Trust Factor, a weekly newsletter exploring what leaders need to succeed. Login here.
