The world’s top equity strategist says investors are falling into the trap again

Every time the stock market rose throughout the year, Wilson warned it was nothing but a trap. And he turned out to be right. The S&P 500 finally fell about 20% in 2022, ending the year at 3,839 far from Wall Street’s high 4,800 average prognosis.

With recent US economic data raising hopes for a soft landing, where inflation is tamed without triggering a recession, the strategist says investors are repeating the same old mistakes. The S&P 500 is up more than 5% so far amid declining inflation and recession fears, but Wilson believes corporate earnings will still take a hit, making the rise just another one bear market rally.

The latter stages of the bear market are always the trickiest, and we’ve been very alert to such head fakes, he wrote in a research note on Sunday. Suffice it to say, we’re not biting on this recent rally because our work and process are so convincingly bearish on earnings.

Wall Street’s consensus earnings estimate for the S&P 500 in 2023 is $228 per share, but even without a recession, Morgan Stanley expects earnings per share of just $195 this year. Wilson said Sunday there is growing evidence that companies’ costs are accelerating. grow than their sales, which will eventually erode profit margins. Because of this, he said, he is even looking more and more at the bear case of $180 per share in earnings for the S&P 500 this year.

Our work shows further revenue erosion, with the gap between our model and future estimates being wider than ever before, he wrote. The last two times our model was this far below consensus, the S&P 500 fell 34% and 49%.

Wilson, who was the last to earn the No. 1 stock strategist honor Institutional investor research, is not alone in fearing that earnings could disappoint investors in the first half of the year. Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a Monday note that he believes an unfavorable risk-reward relationship currently exists in broad indices such as the S&P 500.

We don’t see much room for markets to recover in the near term, especially given our outlook for continued pressure on corporate earnings growth, he wrote, echoing Wilson’s earnings concerns.

Wilson said the S&P 500 could fall about 25% to 3,000 in the first half of this year if corporate profit margins deteriorate, forcing some executives to rethink their overly optimistic outlook. But after that, the strategist argues a new bull market will begin, creating a great buying opportunity for investors as the blue-chip index rebounds to 3,900 by the end of the year.

Wilson went on to say he welcomed the recent rise in stocks, arguing that it is a necessary condition for the bear market’s last breaths. Stock market rallies have been a common feature of bear markets for the past 50 years 6.5 times average.

Wilson said the latest rally is an example of the false signals and misleading reflections in this bear market hall of mirrors and advised investors to be patient as better opportunities to buy stocks are on the horizon.

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