Traders should prepare for a significant pullback in the stock market due to uncertainties surrounding the US presidential campaign, corporate earnings, and Federal Reserve policies, according to Mike Wilson of Morgan Stanley.
“I think the chance of a 10% correction is highly likely sometime between now and the election,” Wilson said in an interview with Bloomberg Television on Monday. He anticipates a volatile third quarter.
The S&P 500 Index started the week at record highs and could set its 35th closing record of the year if it finishes Monday in positive territory. The benchmark has gained 17% since January, driven by expectations of two Fed rate cuts this year and excitement around artificial intelligence. Even Wilson, historically bearish, has softened his stance.
However, more Wall Street professionals are becoming cautious as the third quarter approaches—a typically turbulent period—amid signs that the rally might be overheating.
Scott Rubner of Goldman Sachs expects a challenging two-week period starting in August if corporate earnings disappoint. Andrew Tyler from JPMorgan Chase’s trading desk expressed slightly less confidence due to weakening economic data. Scott Chronert of Citigroup also warned of a potential pullback.
“Your likelihood of upside from now until year-end is very low, much lower than normal,” Wilson said, estimating a 20% to 25% chance that stock prices will end the year higher than they are now.
Wilson’s previously bearish outlook for 2023 didn’t materialize, leading him to raise his S&P 500 target to 5,400 points by mid-2025 from 4,500 through December. Despite this, the index has already surpassed that level, marking a dramatic shift in his outlook.
Bearish views have proven risky for equity strategists as US stocks continue to set records. Marko Kolanovic, a notable skeptic, recently left JPMorgan.
“In the beginning of the year, we moved away from being too bearish. But at the end of the day, this is a tough gig,” Wilson said. “That’s not an excuse, it’s what we get paid to do. Sometimes we get it right, sometimes we get it wrong. It doesn’t put any pressure on me to do my job any differently.”
Wilson emphasized that his role is to provide clients with solid analysis and frameworks for investment decisions, a process that won’t change.
Wilson believes a market pullback could create buying opportunities, advising investors to focus on individual stocks rather than indexes. He and his team recommend high-quality growth stocks, large-cap companies with strong balance sheets, and firms that can deliver on earnings. While momentum will continue, finding affordable shares in these categories is challenging.
“If they were to come in 10%, then we’d probably get interested again,” Wilson said.
