Michael Wilson, the Morgan Stanley strategist known for accurately predicting last month’s market correction, suggests that stocks that have lagged in the current US market rally may soon experience a rebound. This potential upswing is contingent upon the upcoming payroll data, which could provide further evidence of a robust economy.
In a recent research note, Wilson emphasized that a stronger-than-expected jobs report could reassure investors, signaling that growth risks are diminishing. According to a Bloomberg survey, economists expect the August report to reveal an addition of 165,000 jobs, an improvement from the 114,000 jobs added in July.
This year, technology stocks have been the primary drivers of the S&P 500’s rise, leaving other sectors trailing. However, there has been a recent shift as concerns over elevated tech valuations prompt investors to explore other areas of the market. Bloomberg data shows that about 16% of the index is now trading at a 52-week high, up from just 4% at the beginning of the year.
On Tuesday, US stocks dipped, with the tech-heavy Nasdaq 100 falling by 1.3%. Despite this, Wilson remains optimistic about defensive stocks while cautioning against investing in small-cap stocks or other cyclical sectors that have underperformed in recent years due to the ongoing slowdown in growth.
Earlier in July, Wilson warned of a significant market pullback, citing uncertainties surrounding the US election, corporate earnings, and Federal Reserve policies. This prediction materialized when the S&P 500 declined by 8.5% from its peak less than a month later. Although he also predicted a market downturn last year, it did not come to pass.
Since the August selloff, strong economic data has contributed to a market recovery, and Wilson expects this trend to continue with the upcoming jobs report. However, he cautions that weaker-than-expected data, coupled with a rising unemployment rate, could pressure equity valuations as it did last month.
Wilson believes that the “sweet spot” for stocks would be a series of moderate 25 basis point interest rate cuts from the Federal Reserve, paired with stable economic growth. He warns, however, that more aggressive cuts, such as 50 basis points, might not be well-received by the equity markets if they coincide with labor market weakness.
One significant challenge for investors, according to Wilson, is that US stocks are already factoring in a soft landing for the economy. This limits the potential upside for the broader index. Should data rekindle concerns about a hard landing, the market could face “material” declines. Wilson has set a target of 5,400 points for the S&P 500 by mid-2025, which suggests a potential drop of about 4% from current levels.
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