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HomeLatest NewsWilson Report: The False Bullish Signal of 1945 Is Repeating Now

Wilson Report: The False Bullish Signal of 1945 Is Repeating Now

Date: April 24, 2024 Time: 09:07:31

Now that the annual rise in the S&P 500 Index has passed the 20% threshold, many are declaring that the bear market is officially over. Most analysts have come out to make it official, although there are some fairly authoritative dissenting voices on Wall Street. The one that stands out the most is that of Mike Wilson, a Morgan Stanley stock strategy who, in his latest report, comments: “We disagree with this view due to our earnings forecast for 2023.”

The banking firm begins the latest outlook review report by stating that earlier in the year they noted that their view was much more in line with the consensus and commented that it might take some time for that to change. Now, it seems to see it done. In late January, sentiment and positioning improved enough to put stocks vulnerable, and sure enough, there was a 10% correction in the S&P 500 over the next six weeks, with stocks falling on average. shares of around 13%, although it then recovered until March, when it punctured again.

“We believe this is mainly due to the fact that liquidity likely improved with depositor bailouts at the same time that Artificial Intelligence began to gain momentum among investors. The combination of perceived safety and a new growth opportunity opened up was too much for investors to resist,” adds Wilson. Hence, one of the most concentrated markets (in few values) in history is displayed.

For most of the last couple of months, sentiment has remained somewhat bearish, which is part of the reason medians haven’t done much, even as the market capitalization-weighted S&P 500 is down 5 % above their January highs.

However, for the head of the US bank’s stock market now, the sentiment is improving, and has turned fully bullish in the last week, as both minority and institutional flows have returned to the equity markets, with technology being There is artificial intelligence the dominant theme that investors want to have in their portfolio.

“But keep in mind that in recent weeks small-cap stocks and other non-tech assets have outperformed relatively higher, which leads us to wonder if the market is beginning to enjoy greater breadth. and if it is an early sign that the bear market is officially over,” Wilson says.

without singing victory

The expert believes that the champagne of the downtrend should not be uncorked and invites us to go back to other moments in the past where important traps occurred in the markets. “First of all, a few days doesn’t create a new trend. Secondly, I think this reversal of small caps and other lower quality stocks may just be another form of risk reduction as these are the most shorted areas of the market right now.” concrete before giving the example of Nvidia as a firm inflated by valuation in disproportionate terms.

For Wislon, the threshold of a 20% rebound in the stock market is not enough to welcome the bull market. “Our conclusion is based more on fundamentals, valuations and expectations regarding our outlook (…) our view of corporate earnings is much more pessimistic than current consensus forecasts, which now assume a real story acceleration in the second semester”, analyzed.

As described, you can find several cases of bear market rallies that exceeded the 20% threshold to end up giving way to new lows. “One example is especially relevant given our boom-and-bust framework of the 1940s and 1950s,” he reviews moments from the past.

In those years, following the 1946 boom that came after the end of the war, the S&P 500 suffered a 28% correction, followed by a 24% bearish rally that lasted nearly 18 months before succumbing to new lows for another year. late. “So far, this looks similar to the current bear market, which corrected 27.5% last year and has now rallied 24% from intraday lows, but is still 10% below the highs,” Wilson says throughout. of the text.

In short, sentiment and positioning are now 180 degrees from where they were on January 1. “This means that stocks are no longer prepared for the disappointment that we think is coming in the form of much weaker than expected earnings this year,” says the bank expert.

“This readjustment can take place slowly, as companies fail one by one, or due to some exogenous shock that the market cannot absorb (…) In the latter case, it is likely that the income risk premium variable to shoot up quickly, P/E to fall precipitously, and make our durable price low before estimates seriously fall.”

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Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.
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