Morgan Stanley bearish analyst Wilson: The Fed has given a reason to be bullish on US stocks until 2024
Wilson believes that if the Federal Reserve starts to pay more attention to maintaining economic growth and reduces concerns about inflation, the chances of a soft landing will increase. He expects this to drive sectors such as small-cap stocks, which have underperformed the broader market this year, to catch up and experience a rally.
The shift in the Federal Reserve's stance has impressed those investors who are most bearish on the market. Michael Wilson, a strategist at Morgan Stanley, known as a major bear in the US stock market, recently stated in a report that the Fed seems to have shifted its focus from inflation to maintaining the economic growth trajectory that has already emerged this year, giving the market a reason to be bullish on US stocks next year.
Wilson pointed out that, driven by this expectation, sectors such as small-cap stocks that underperformed the S&P 500 index in 2023 will continue to rise, and there is almost no sign of a slowdown in the overall rebound of all assets.
If the US economy experiences a soft landing without reigniting inflation, stocks that are more sensitive to changes in interest rates and economic prospects, such as small-cap stocks, may rebound even more strongly on the basis of the astonishing rebound that began in November.
Since October 31st, the iShares Russell 2000 ETF (IWM) has risen by nearly 20%, briefly reaching its highest level since late July last week. During the same period, the S&P 500 index rose by 12.5%.
Wilson believes that if the Fed starts to pay more attention to maintaining economic growth and reduces concerns about inflation, the probability of a soft landing will increase. He expects this to drive sectors such as small-cap stocks that have underperformed the broader market this year to catch up.
"If inflation remains at a high level, small-cap stocks/cyclical stocks/low-quality stocks may benefit. Of course, this is a delicate balance when inflation statistics are still above the target. If these data start to rebound, the Fed may reverse its direction. But for now, if nominal growth accelerates, we may enter a sweet spot that supports this rotation."
Wilson is one of the most stubborn bears on Wall Street in 2023, but he has frequently faced setbacks this year and his views have reversed. In July of this year, when US stocks were rising, he sent an apology statement to his clients.