Wall Street's Biggest Bear Just Turned Bullish on Stocks—But He Warns 'Uncertainty' Still Reign

Economic

Stocks

Summary:

Wall Street's biggest bear just gave up on waiting for winter...

After predicting a serious stock market correction for over a year, Morgan Stanley's chief investment officer and chief U.S. equity strategist Mike Wilson changed his tune in a Sunday note, saying he now expects the S&P 500 to rise 1.5% to 5,400 over the next 12 months.

A 1.5% rise in stocks over a 12-month period may not sound like a bullish take, given the roughly 10% average annual return of the S&P 500 over the past 100 years, but it's a big change of heart for Wilson. The veteran strategist previously expected the blue-chip index to sink 15% to 4,500 over the next 12 months—and he's been bearish for some time.

This new shift aligns Wilson's market outlook with the economic forecasts of Morgan Stanley's chief U.S. economist Ellen Zentner, who raised her GDP growth projections in February and is expecting fading inflation as well as three interest rate cuts this year, which should relieve some of the current pressure on corporate earnings.

As for Wilson, he earned the nod as Wall Street's top strategist in 2022 for his prescient prediction that stocks would tumble that year due to a combination of “fire and ice” (also known as rising interest rates and fading economic growth). But his pessimistic disposition has led to some misfired forecasts over the past year and a half.

In January 2023, he warned that bullish investors were falling into a bear market trap by buying stocks, noting that his earnings models showed “erosion” in corporate profit margins. “The final stages of the bear market are always the trickiest, and we have been on high alert for such head fakes,” he wrote at the time. “Suffice it to say, we're not biting on this recent rally because our work and process are so convincingly bearish on earnings.”

Six months later, despite an ongoing surge in U.S. stocks, Wilson argued that markets were headed for disaster due to the Fed's economy-slowing rate hikes, fading fiscal support, and a profit slowdown. “Risks for a major correction have rarely been higher,” he told investors.

Even this year, Wilson has remained bearish on U.S. markets. Economic growth would need to surge for stocks to continue their run of good form, the CIO argued in January, saying that “this suggests a trading range until the outcome is more definitive.”

All of that turned out to be, well, a bit off base. Between Jan. 2023 and May 2024, instead of dropping like Wilson predicted, the S&P 500 surged more than 38%, hitting a record high above 5,300.

Now Morgan Stanley's top investor is walking back some of his bearish market calls, at least partly, and it's due to economic uncertainty. “In short, macro outcomes have become increasingly hard to predict as data have become more volatile,” Wilson wrote in his Sunday note to clients. “We see this environment persisting.”

There's been a fierce debate over the outlook for the U.S. economy ever since the Federal Reserve began raising interest rates to fight inflation in March 2022. For a time, most economists and Wall Street strategists believed rising borrowing costs and stubborn inflation would ultimately slow the economy to a standstill, leading to a “hard landing” (a.k.a. a recession).

But throughout 2023, with the economy proving its resilience to higher interest rates and rising prices, an increasing number of experts became convinced that a “soft landing”—where inflation fades without a job-killing recession—was the more likely path for the U.S. Strong consumer spending, labor market, and corporate earnings data even convinced many forecasters earlier this year that a “no landing” scenario that features higher economic growth and more stubborn inflation is now likely.

Wilson described how the consensus outlook for the U.S. economy has “bounced” between these three scenarios over the past few years due to volatile data releases in his Sunday note to clients, with the last few months of “bumpy” inflation data serving as a “microcosm” of this dynamic.

As a result of this macroeconomic uncertainty, the veteran CIO released a wide range of potential outcomes for U.S. markets over the weekend, including a seriously optimistic bull case and a direly pessimistic bear case.

“We think it makes sense to present a wider range of bull and bear case price targets than usual. Furthermore, we think the probability of the tail outcomes is higher than normal as well, while our base case is less certain,” he wrote.

Wilson's wider range of potential outcomes for markets is backed up by history. Market returns at the start of interest rate cutting cycles—like the one Morgan Stanley's economists are predicting will begin later this year—have been all over the place historically. Sometimes markets boom when the Fed begins to cut; other times it's nothing but bad news.

Wall Street's Biggest Bear Just Turned Bullish on Stocks—But He Warns 'Uncertainty' Still Reign_1

“In many ways, this analysis encapsulates our outlook well—a balanced risk/reward profile in the average/baseline view, but the potential for a wide array of scenarios to play out,” Wilson wrote. “Once again, get ready for some notable swings in sentiment, positioning and prices.”

While Wilson's base case outlook for the S&P 500 is now 5,400, if a recession hits, he sees the blue-chip index falling to 4,200, which represents a roughly 20% downside. Corporate earnings and stock market valuations would sink dramatically in this scenario.

However, if the U.S. avoids a recession and the federal government continues to pump money into the economy, driving corporate earnings growth and boosting valuations, then the S&P 500 could surge roughly 20% to 6,350 over the next 12 months, according to Wilson.

“It's a continuation of the multiple expansion and earnings recovery we have been experiencing,” he explained. “The challenge with this scenario is that inflation may get out of control again and force the Fed to hike, but given its recent predisposition to cut rather than hike even in the face of bumpy inflation data, it appears the Fed may already not be as focused on its 2% target.”

But valuations will ‘normalize'—eventually

Wilson's base case for U.S. stocks is now far more bullish, and he even argues there could be a “Goldilocks” bull-case scenario for markets if fiscal spending continues and the U.S. avoids a recession. But eventually, valuations will have to come back to Earth. And that means stock market investors should remain cautious and stick with high-quality names, according to the CIO.

“It's very hard to predict exactly when valuations will normalize, but we remain confident that valuation matters in the end and that we are not in a new paradigm that justifies permanently higher [price-to-earnings ratios],” he wrote.

To Wilson's point, the S&P 500 currently trades at roughly 25 times earnings, compared to the historical average of just 18 times earnings. Wilson and his team of analysts argued that investors should look to quality stocks—companies with strong balance sheets, cash flows, lower debt levels, and proven business models—in this environment. Because if a recession does hit, the risky, high-flying AI stocks that many investors have fallen for will likely struggle.

Still, Wilson capped off his note with a bit of humility—and a warning that this is an era of uncertainty for markets. “Truth be told, our ability to forecast the [S&P 500's price-to-earnings ratio] over the last year has been poor and while we are confident valuations are too high, we have little confidence in our ability to predict the exact timing or magnitude of this normalization,” he wrote. “This adds to the higher than normal uncertainty in our outlook for equity prices.”

Source: Fortune

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Remarks of Officials

Federal Reserve Governor Michael S. Barr said in a speech on May 20, local time, as follows.

Recent economic developments indicate that the U.S. economy is strong, and labor supply and demand have come into better balance due to improved labor force participation and immigration. The unemployment rate has been below 4 percent for 27 consecutive months, the longest stretch of unemployment that low in more than 50 years.

Inflation readings in the first quarter of this year did not provide me with the increased confidence that I was hoping to find to support easing monetary policy, said Barr. This means that we will need to allow our restrictive policy some further time to continue to do its work.

On the same day, Cleveland Fed President Mester said, "I was on the record before saying I was at the median [forecast] which was three. For the developments I've seen in the economy right now, I would not think that that's still appropriate."

Inflation risks have risen since the first quarter of this year, with the real economy stronger than expected. The latest CPI data, although encouraging, is still at a high level, said Mester, the risk of inflation is still skewed to the upside, but inflation will eventually fall.

Monetary policy is dampening demand, but not as quickly as expected. Whether inflation risks are on the upside or downside, the current restrictive monetary policy is sufficient to deal with them. Mester does not have a specific time for a rate cut, which depends on inflation progress.

Mester stressed she hasn't made up her mind about where her "dot" will land (referring to the dot plot of interest rate projections in the June SEP).

Mester also said there is no risk in spending more time collecting inflation data as the economy is performing strongly. If inflation unexpectedly stagnates or rebounds, interest rates will stay unchanged or even be raised. If there is an unexpected deterioration in the economy, rates could be cut.

Both Fed officials agreed that current inflation risks are still on the upside and are not sufficient to support a rate cut, so the Fed needs to maintain the current restrictive rate level for longer.

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Samantha Luan

Economic

The only analyst who accurately predicted both of Bank Indonesia’s most recent interest-rate increases honed his forecasting skills in a newsroom, not a trading room — and he expects one more hike by year-end.

Before Satria Sambijantoro, 34, became the head of research at PT Bahana Sekuritas, he was a reporter in Indonesia’s national broadsheet The Jakarta Post — a career move that brought his mother to tears after he graduated with an economics degree.

“She always prayed that I would work in Bank Indonesia,” he said. “Maybe her prayers weren’t specific enough because I did end up working in Bank Indonesia, but as a journalist.”

However, it was his four years covering the central bank’s media briefings and getting to know its officials — including a then-Deputy Governor Perry Warjiyo — that gave him a unique view of Indonesia’s monetary policymaking. He was the only one in a Bloomberg poll of 31 economists who predicted the October rate hike. Last month, he was one out of 11 analysts who correctly penciled in another increase.

“Governor Perry is dovish at heart but ultimately pragmatic. He’s not afraid to do what needs to be done to stabilize the rupiah,” Sambijantoro said, pointing out that Warjiyo kicked off his stint as central bank chief in 2018 with 100 basis points in rate hikes over two months to stem a currency rout.

Sambijantoro expects one more 25-basis point rate hike to take the BI-Rate to 6.5%, a fresh high for the benchmark introduced in 2016. That’s counter to Warjiyo’s comments earlier this month that the tightening cycle is likely done, and an example of how Sambijantoro has earned the moniker “Brave Boy” in some journalist circles.

“BI will likely want to preserve its bullets and take an opportunistic rate hike possibly in the next two months,” Sambijantoro said, even as he joins 35 other analysts in predicting BI to hold on Wednesday.

Unusual Indicators

His contrarian view requires him to look past public pronouncements even from the governor himself, as well as tracking unusual indicators like palm oil output to chart Indonesia’s interest-rate path.

Bank Indonesia took markets by surprise when it delivered quarter-point rate hikes each in October and April. In both instances, Warjiyo had said weeks prior that the benchmark BI-Rate would be kept on hold, and even signaled its next move would likely be a cut.

This time, weakness in Asian currencies including the rupiah may prompt BI to tighten once again, especially as China could seek to devalue the yuan to offset the impact of US tariffs on its exports. Meanwhile the US’s expanded debt borrowing ahead of elections could worsen ongoing uncertainty over the Federal Reserve’s rate path, he said.

Sambijantoro is also watching the palm oil sector as one of the biggest suppliers of dollars in Indonesia as exporters often need to convert their foreign earnings to rupiah for workers’ wages. Higher output in Malaysia and Indonesia could mean lower palm oil prices and weaker inflows of the greenback. In addition, rising crude oil prices could mean more dollar demand for fuel imports.

“Policymaking is more of an art than a science,” Sambijantoro said, quoting former BI chief Darmin Nasution. Market sentiment and Warjiyo’s track record of swift action can’t be calculated by models, he added.

Source:Bloomberg

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Kevin Du

Economic

Commodity

Oil prices fell due to expectations of sustained U.S. inflation and higher interest rates.Political uncertainties in Iran and Saudi Arabia had minimal market impact ahead of OPEC+ meeting.Both benchmarks declined less than 1% as Fed officials await clearer signs of slowing inflation.

Market Overview

Oil prices declined in early Asian trading on Tuesday, with expectations of sustained U.S. inflation and higher interest rates dampening consumer and industrial demand.

Both benchmarks fell less than 1% on Monday as Federal Reserve officials awaited clearer signs of slowing inflation before considering rate cuts. Analysts noted fears of weaker demand due to delayed rate cuts.

Political uncertainties in Iran and Saudi Arabia had little impact on the market. Investors are now focusing on the upcoming OPEC+ meeting on June 1, which will address output policy and potential extensions of voluntary production cuts.

Natural Gas Price Forecast

Natural Gas and Oil Forecast: Prices Fall Less Than 1%, Downtrend Expected?_1

Natural Gas (NG) prices fell to $2.736, down 0.10%, in early trading. Key technical levels include a pivot point at $2.75. Immediate resistance is at $2.81, followed by $2.89 and $2.97.

On the downside, immediate support is at $2.63, with further support at $2.55 and $2.45. Technical indicators show the 50-day EMA at $2.45 and the 200-day EMA at $2.12.

The outlook remains bearish below $2.75, but a break above this level could signal a shift to a more bullish trend.

WTI Oil Price Forecast

Natural Gas and Oil Forecast: Prices Fall Less Than 1%, Downtrend Expected?_2

WTI Crude oil (USOIL) prices fell to $78.76, down 0.48%, in early trading. Key technical levels to watch include the pivot point at $79.84. Immediate resistance is seen at $80.67, followed by $81.52 and $82.29.

On the downside, immediate support is at $78.53, with further support at $77.70 and $76.65. Technical indicators show the 50-day EMA at $79.07 and the 200-day EMA at $80.48.

The outlook remains bearish below $79.84, but a break above this level could signal a shift to a more bullish trend.

Brent Oil Price Forecast

Natural Gas and Oil Forecast: Prices Fall Less Than 1%, Downtrend Expected?_3

Brent crude oil (UKOIL) prices fell to $83.15, down 0.56%, in early trading. Key technical levels include a pivot point at $83.51. Immediate resistance is at $84.51, followed by $85.82 and $86.88.

On the downside, immediate support is at $82.13, with further support at $81.04 and $80.05. Technical indicators show the 50-day EMA at $83.50 and the 200-day EMA at $84.99.

The outlook remains bearish below $83.51, but a break above this level could signal a shift to a more bullish trend.

For a look at all of today's economic events, check out our economic calendar.

Source: FX Empire

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Warren Takunda

Economic

Stocks

Asian stocks drifted lower while the dollar held firm on Tuesday as investors awaited minutes of the Federal Reserve's latest policy meeting to gauge the timing and extent of possible interest rate cuts this year.

Gold eased back from Monday's all-time peak, while crude oil declined on worries of U.S. interest rates staying high for longer as Fed officials maintained a cautious view on a recent easing of inflation.

Cryptocurrencies ether and bitcoin climbed to fresh six-week peaks amid speculation that the U.S. Securities and Exchange Commission (SEC) may approve a spot ether exchange-traded fund (ETF).

Markets currently factor in about 41 basis points of Fed rate reductions this year, with a quarter-point cut fully priced in for November.

Traders rushed to rebuild easing bets after data earlier this month showed consumer price pressures mitigated in April, following a string of three months of upside surprises at the start of the year.

Even so, Fed officials are reluctant to declare inflation is coming under control, with Vice Chair Philip Jefferson saying on Monday that it was too early to tell if the slowdown is "long lasting," and Vice Chair Michael Barr saying restrictive policy needs more time.

Minutes of the last Fed meeting due on Wednesday could provide valuable insight into the future policy path, although the deliberations predate last week's softer CPI reading.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.9%, weighed down by the Hang Seng's 1.9% pullback from Monday's multi-month peak.

Japan's tech-heavy Nikkei tracked overnight gains for the Nasdaq to a record high, before reversing course to trade 0.1% lower.

Nasdaq futures inched 0.06% lower. S&P 500 futures were flat after Monday's 0.1% gain.

"Market sentiment remains relatively robust, with implied volatility low, supported by greater confidence in U.S. rate cuts this year," Kyle Rodda, senior markets analyst at Capital.com, wrote in a note.

At the same time, record highs for metals such as gold and copper "is being pointed to as a signal economic activity is improving globally, and that may be a factor keeping inflation sticky," Rodda said.

Gold eased 0.3% to about $2,417 per ounce, after pushing to the cusp of $2,450 for the first time overnight.

The greenback held its ground against major peers, with the dollar index flat at 104.62 after rebounding from a five-week trough of 104.07 reached on Thursday.

The 10-year Treasury yield was little changed at 4.4433%, after ticking up 1.7 basis points on Monday.

Brent crude futures declined 0.7% to $83.17 a barrel and U.S. West Texas Intermediate crude (WTI) eased 0.7% to $79.22.

Meanwhile, the standout performers of Monday climbed to fresh highs, as traders snapped up cryptocurrencies following a report that the SEC had abruptly asked exchanges that want to trade ether ETFs to update regulatory filings, boosting bets that approval could come this week.

Bitcoin climbed as high as $71,957 and ether jumped to $3,720.80, both hitting levels not seen since April 9.

"Speculation around the ether ETF has certainly played its part in the move, throwing fuel on the crypto bull market bonfire that had reignited after last week's cooler U.S. CPI data," said IG analyst Tony Sycamore.

Sycamore expects bitcoin to retest the all-time high at $73,803.25 in coming days before making a push for $80,000.

Source: Reuters

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Thomas

Economic

Bond

India may consider cutting its bond sales this year aided by a higher cash balance, according to people familiar with the matter.

The government is looking at multiple options to utilize its surplus cash and if the response to bond buybacks doesn't improve it may cut borrowings, they said, asking not to be identified as a final decision will be taken in the full budget after the national elections are over next month.

India plans to borrow 14.13 trillion rupees ($170 billion) in the financial year ending March 2025, according to the February interim budget. Any reduction may help push down bond yields amid India's inclusion into a key global bond index.

The yield on benchmark 10-year bond was little changed at 7.09% on Tuesday.

Earlier this month, authorities surprised markets with a plan to repurchase bonds maturing in the current fiscal year. The buybacks, aimed at using the surplus cash and reducing interest costs, fell short of expectations as traders demanded higher prices, forcing the central bank to accept only a portion of the bids.

The government won't be deliberately disruptive but it will protect its interest over those of bond investors, the people said, suggesting the Reserve Bank of India will be unwilling to offer lower yields in its third buyback of 600 billion rupees due on Tuesday.

A Finance Ministry spokesperson didn't respond to a request seeking comment.

The government decides on repurchasing bonds based on its cash position and the auction is conducted by the RBI. Its cash balance has gone up due to several factors, including higher revenues and lower expenditure during elections. Last week, it also lowered short-term borrowings after a tepid response to debt buybacks.

Investors perceive a reduction in short-term bill issuance as a better alternative to buybacks, DBS Group Holdings Ltd. economist Radhika Rao wrote in a note. The government's cash balance approached 3 trillion rupees around mid-May, keeping liquidity relatively tight, she said.

Even after the polls are over, the government may continue to have excess cash, aided by dividend from RBI, requiring it to revisit the borrowings, the people said.

India's unexpected move to buy back bonds signaled the central bank is getting proactive in easing liquidity and may switch to a neutral interest-rate stance in its June policy, according to Citigroup Inc.

This is purely a government initiative to cut down its cash and the RBI is confident of managing liquidity using various other tools, the people said.

Source: Bloomberg

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ING

Economic

Central Bank

Headline inflation is virtually back to target

It’s no exaggeration to say that this week’s UK inflation data will make or break a June rate cut from the Bank of England. Markets are pricing a 58% chance of that happening, at the time of writing.

Certainly at a headline level, the story should be a good one. Overall inflation, previously 3.2%, is likely to fall to within a whisker of the Bank’s 2% target. Some of this can be traced back to the 12% fall in household electricity/gas bills that we saw at the start of April. And we’re likely to see something similar again in July.

That’s when Ofgem – the UK’s energy regulator – next updates the household price cap, and wholesale natural gas prices were lower during the so-called ‘observation window’ than they were when April’s cap was calculated. The result is that electricity/gas will be subtracting roughly one percentage point or more from headline inflation during the second and third quarters.

UK Services Inflation to Make or Break a June Bank of England Rate Cut_1

Utilities are only part of the story though. Food price inflation is slowing very rapidly, and having peaked close to 20% this time last year, we think it’ll be near enough zero over the summer. Producer price inflation – a gauge of what the supermarkets are effectively paying – has been flat or slightly negative for several months now, and that’s very clearly feeding through to consumers. Take a look at this chart of the three-month annualised change in consumer and producer food prices below.

Food price inflation has slowed right down

UK Services Inflation to Make or Break a June Bank of England Rate Cut_2

There’s also some further disinflation in ‘core goods’ too – that’s anything unrelated to energy. We’ve already seen a lot of progress here, with both household goods and vehicles in deflation now. This is a legacy of improved supply chains, higher inventory levels and lower consumer demand last year. While the latter is starting to improve, we think there’s still some further limited disinflation to come in this area of the inflation basket.

The result is that headline inflation will, we think, dip below the Bank of England’s 2% target in May’s data due in June and stay there for most – if not all – of this year. Interestingly, the BoE itself expects headline CPI to end the year closer to 3%. UK Services Inflation to Make or Break a June Bank of England Rate Cut_3

UK Services Inflation to Make or Break a June Bank of England Rate Cut_3

Services inflation is a major uncertainty this week

If we’re right, then that should be a recipe for several rate cuts this year. We expect at least three, which is slightly more than markets are pricing.

But in the very short term, there’s still some uncertainty over services inflation. That’s ultimately what the BoE is most interested in, and it seems to have assumed even greater prominence in the monetary policy decision-making process given recent volatility in the wage figures.

Again the story here is improving, but crucially we think the risk to this week’s services CPI figure is to the upside. April is a time where several price categories see annual price resets, often linked explicitly to prior rates of headline inflation. Just think of phone or internet bills, for example. Social rents are another key area to watch.

On paper, this process should therefore be fairly predictable. We know that the recent headline inflation rates underpinning these price rises are considerably lower than they were last April.

But last year showed how unpredictable this process can be. Services inflation came in significantly higher than everyone – the BoE included – had expected, triggering the biggest single daily move in UK swap rates for the whole of 2023. The figure in 2022 was also pretty high.

2022 and 2023 saw big April price spikes in services

UK Services Inflation to Make or Break a June Bank of England Rate Cut_4

The Bank of England expects services inflation to dip from 6.0% to 5.5% in April’s data due this week. Consensus expects 5.4%, and we expect 5.6%. Slight deviations here or there are not likely to substantially move the needle for the Bank. And it's worth saying we do get another inflation release just ahead of June’s meeting, but we think there’s less uncertainty surrounding that set of data.

Policymakers have indicated that the data needs only come in roughly in line with forecasts to justify a near-term cut; it doesn’t require a material undershoot. BoE Governor Andrew Bailey, who was noticeably dovish in his recent press conference, doesn’t appear to need much more evidence to be comfortable with cutting rates.

The bottom line is that if the data comes in with expectations, a June rate cut would quickly become the base case. But given the committee is visibly divided, a bigger upside surprise to services inflation this week would move the dial back towards August for the first rate cut. That’s been our long-held base case, and we'll review that after this week's data.

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