The Morgan Stanley strategist who foresaw last month’s market correction says stocks that have lagged the rally in US stocks could get a boost if data due Friday provides further evidence of a resilient economy.
A stronger-than-expected payrolls number would likely give investors “greater confidence that growth risks have subsided,” Michael Wilson, chief US equity strategist at the bank, wrote in a research note. Economists in a Bloomberg survey expect the report to show that 165,000 jobs were added last month compared with 114,000 in July.
Technology stocks have largely driven the surge in the S&P 500 this year, leaving other sectors with a lot of catching up to do. That trend has started to shift in recent weeks as concern that tech valuations are getting too high pushed investors into other parts of the market. About 16% of the index is now trading at a 52-week high, compared with 4% at the beginning of the year, according to data compiled by Bloomberg.
Wilson reiterated his preference for defensive stocks, while warning against buying into small-cap stocks or “other cheap cyclicals that have underperformed over the past few years, mainly because of the growth deceleration that is ongoing.”
Wilson warned in early July that traders should brace for a significant pullback in the stock market amid uncertainty around the US election, corporate earnings and Federal Reserve policy. Less than a month later, the S&P 500 had slumped 8.5% from its peak. Wilson also predicted a stock-market slide last year, but it failed to materialize.
Strong economic data since the August selloff have helped the market recover and Wilson expects this week’s jobs report to bolster that trend. On the other hand, weaker-than-expected data accompanied by an increase in the unemployment rate would “pressure equity valuations like last month,” he wrote.
The “sweet spot” for stocks would be a series of interest-rate cuts of about 25 basis points from the Federal Reserve along with stable growth, Wilson added. “A more dovish policy reaction than that (i.e., 50 bp cuts) may not be viewed favorably by the equity market if it comes alongside labor market weakness.”
Wilson warned one “challenge” for investors is that US stocks are already pricing in a soft landing, limiting the upside for the index as a whole. And if data were to rekindle fears of a hard landing, that could spark “material” declines, he said.
The strategist has a target of 5,400 points for the S&P 500 by mid-2025, implying a drop of about 4% from current levels.