Investors should remain vigilant and be wary of falling into a trap of betting on stocks after last week’s rally, Wall Street’s top strategist warned on Monday.
Stocks on Wall Street enjoyed a winning streak last week, with the S&P rallying on Friday, surpassing 4,200 during the session and closing at 4,192 points, its highest level in months.
However, Morgan Stanley’s CIO and chief U.S. equity strategist Mike Wilson—who was voted No. 1 stock strategist in an October survey by Institutional Investor after being one of the few Wall Street strategists to predict 2022’s selloff—warned on Monday that investors should remain wary, in spite of the recent upward trajectory.
“Is this finally the breakout to confirm a new bull market? The short answer is no,” he wrote in a note to clients on Monday. Numerous risks persisted, he argued, including overvaluations and gains being driven by a limited range of equities.
New York–listed shares were little changed on Monday as investors awaited news on the outcome of talks in Washington about the U.S. debt ceiling.
President Joe Biden and Republican House Speaker Kevin McCarthy are meeting in person on Monday to continue discussions about raising the country’s debt ceiling as the government continues to edge closer to its borrowing limit.
While many investors are taking stock of how the talks go, Wilson suggested that investors should not draw too much from the result of the negotiations.
He said in Monday’s note that although a resolution might temporarily push stocks higher, Morgan Stanley would see this as “a false breakout/bull trap.”
The Morgan Stanley veteran, a staunch bear, has long taken a pessimistic view about how U.S. stocks will trade in 2023.
Earlier this year, he warned stocks could soon plummet 20% before even reaching their 2023 bottom, with his base case being that the S&P 500 ends the year at 3,900 points.
While Wilson sounded the alarm to investors on Monday, Bank of America strategist Savita Subramanian struck a more positive note over the weekend and hiked her year-end target for the S&P 500 from 4,000 points to 4,300.
“Current valuations are not low, but rarely are low during profits recessions. On cyclically adjusted earnings, valuations argue for price returns of 5% per year for the S&P 500 over the next decade,” she argued in a note on Sunday.