The Dow eagerly sped toward a fourth consecutive gain on Friday, just one day after the stock market bellwether zoomed past its previous record to close above 27,000 for the first time ever.
But as Wall Street continues to bid up valuations more than a decade into this bull run, one Morgan Stanley executive warns that the stock market could be on the verge of a 10% crash – dovish Fed or not.
Wall Street’s three major indices each traded higher to open the week’s final trading session. The Dow Jones Industrial Average surged to yet another all-time high at the bell; the DJIA last stood at 27,168 for a gain of 79.97 points or 0.3%.
The S&P 500 once again edged past the elusive 3,000 point mark. The index added 3.35 points or 0.11% to trade at 3,003.22.
The Nasdaq rose 12.02 points or 0.15% to 8,208.06.
Wall Street continues to squeeze every last bit of optimism out of Fed Chair Jerome Powell’s congressional testimony, which – Fedspeak or not – clearly signaled that at least one interest rate cut is coming.
But as the stock market continues to grace new heights on the back of corporate buybacks and dovish monetary policy, Morgan Stanley Chief Investment Officer Mike Wilson warns that the party won’t last forever.
Wilson’s not exactly what you’d call a bear, but he does believe the market has become imprudently cavalier about the risks that this decade-long expansion faces.
The greatest threat? Recession.
Quoted by Business Insider, Wilson – also Morgan Stanley’s chief US equity strategist – predicted that upcoming earnings seasons would expose corporate guidance as far too optimistic. He expects actual earnings to come in significantly below current estimates, which will be a clear sign that the US economic slowdown has broached recession territory.
“With our view that a recession is looking more likely over the next 12 months, it’s also likely that company earnings guidance for the next 12 months is too high,” he said. “Given the significant deterioration in the macro data over the past few months, and the fact that we are now past the halfway point for the year, we suspect companies may feel the need to lower their optimistic, full-year earnings guidance provided back in January.”
A recession would offset the stimulus from Federal Reserve rate cuts, which are all but a certainty following Powell’s dovish commentary on Capitol Hill this week.
Given that the stock market has already priced in those rate cuts to fuel the last leg of its rally, a recession – along with expected seasonal equity slowdowns – could exact a hefty price from investors.
How hefty? Wilson says he expects a 10% pullback from present levels. That would snap the Dow back to about 24,500, force the S&P 500 down to 2,700, and reduce the Nasdaq to 7,400.