The last full week of trading for May is set to kick off on a subdued note, as markets wait for progress on the debt ceiling and more Fed clarity on interest rate direction. But the S&P 500’s
surprising bust out of a range last week has opened up a debate on Wall Street about whether or not that move has any teeth to it. Morgan Stanley’s Mike Wilson, in our call of the day, sees a dangerous trap.
“Last week’s price action showed signs of panic by investors who are afraid they’ll miss the next bull market. We believe this will prove to be a head fake rally like last summer’s for many reasons,” Wilson told clients in a Sunday note. “With the index showing some signs that it wants to break out, market internals are much less attractive today and leadership has changed dramatically,” he says. Don’t miss: Bull’s bad breadth unlike anything in 30 years, says technical analyst Read: How to invest in one of the hottest stock market sectors while cutting your risk For example, he sees not just the top 10-20 stocks looking expensive, but the S&P 500 median stock forward price/earnings [P/E] ratio at 18.3 times, and S&P 500 ex-tech median P/E at 18 — both within the top 15% of historical levels. Second, a “very healthy re-acceleration” is baked into second-half consensus forecasts for earnings, but Morgan Stanley’s forecasts “continue to point materially lower.” Wilson says their own model has been highly accurate over time and recently. He said they started warning of an earnings recession a year ago, and got a lot of pushback. “However, our model proved quite prescient based on the results and is now projecting a much more dire outcome than consensus. Given its historical and more recent track record, we think consensus estimates are off by as much as 20% for this year,” said Wilson. What else? Stocks are pricing in Fed cuts …
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