Morgan Stanley: Stock Market Vulnerable, Sentiment ‘Extremely Bearish’
Earlier this week, Morgan Stanley strategist Mike Wilson said on CNBC Fast Money that the stock market is still vulnerable to a short-term drop.
Although the stock market has shown extreme levels of bearish sentiment and an intense sell-off throughout December 2018 that may be a signal for the establishment of a bottom, Wilson said that fundamentals are still missing from the market.
When Will the Stock Market Bottom?
According to Wilson, the fundamentals of the market remain messy and Wall Street is concerned about the performance of the market.
He said :
Valuation, we met our goal. We also met our goal in terms of sentiment and position, it’s really bearish, extremely bearish. It’s as bearish as we’ve seen. What we don’t have yet is the fundamental picture is still messy. All the things we’ve been worried about, the market’s been worried about all year are now starting to come to the fore.
Given the intensity of the sell-off of the U.S. stock market and several uncertainties including the trade war with China, Wilson explained that similar to how the bear market was extended throughout the last two quarters of 2018, it may take a relatively long time to establish a bottom in the stock market.
Several issues such as the poor performance of Apple, the unwillingness of the Chinese authorities to compromise on certain areas like industrial policy, and many internal factors were outlined as reasons to avoid an all-clear in the stock market.
“While Apple maybe isn’t a surprise that they missed, the magnitude of it was a surprise. While Skyworks isn’t a surprise, that’s not necessarily good news. Our view is that the rolling bear market that happened last year is going to be a rolling bottom. Not everything is going to bottom at the same time but my guess is it’s going to be first in and first out. The stuff that let us in will probably lead us out,” Wilson added.
What are the Fundamentals?
Strategists like Wilson are cautious in declaring a bottom in the U.S. stock market due to the declining earnings revision breadth, which refers to the number of firms in the S&P 500 revising future profits higher against firms making revisions based on declining profits.
It’s growth. Ultimately, it’s earnings. Are we going to have accelerating earnings growth. When is earnings growth going to bottom? So the two things I’m most focused on right now is earnings revision breadth. That is the reason why we were negative last year. It has turned down sharply. It’s 8 percent negative.
As long as companies are lowering profit expectations and revising their earnings, the Morgan Stanley strategist suggested that it is too early to safely state that the stock market is all clear of any short-term and imminent danger.
The Dow Jones has added 500 points since January 8 but it has yet to recover to December levels at 24,500 to 25,000 points.
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