Investors have their heads in the clouds—or buried in the sand—and are running out of time to salvage their results before risking a “catastrophic” end, Morgan Stanley strategists have warned.
Mike Wilson’s gloomy forecast comes as the S&P 500 continues to rally, up 16% from its October lows and 6% since the start of the year. Morgan Stanley’s chief investment officer, voted No. 1 stock strategist in the October survey by Institutional investorsdrew attention to the comparison of Jon Krakauer’s ‘In Thin Air‘, which describes the tragic true story of three separate expeditions attempting to climb Mount Everest when the summit claims its worst death toll in season one.
Wilson argues the benchmark equity index finds itself in the financial equivalent of the “death zone”, a term mountain climbers use to refer to places where there is insufficient oxygen to sustain human life for long periods of time.
“By choice or out of necessity, investors have driven stock prices to very high levels because liquidity (bottled oxygen) allowed them to enter territory where they knew they wouldn’t have to leave and wouldn’t survive long,” Wilson wrote, according to Watch Market. “He climbs in pursuit of the highest peak out of greed, thinking that he will be able to climb without catastrophic consequences. But the oxygen eventually runs out and those who ignore it risk getting hurt.
According to Wilson’s estimates, the S&P 500’s price-to-earnings ratio has risen to 18 at the end of last year from just 15 in October. He believes that the index has now risen to a height where the air is the thinnest since the bull market began in 2009, with a current P/E ratio of 18.6.
Instead of taking up valuations as a sign “the air has begun to thin” and they may be left out in the cold, Wilson said investors have taken “even more dangerous” route by betting on the most speculative stocks.
The danger is becoming a reality
Wilson is no stranger to doomsday prophecies. The staunch bear correctly predicted the selloff last year, when US equities posted their worst performance since the global financial crisis.
Earlier this month, Wilson issued another pessimistic outlook, warning that the stock market would decline this spring before rebounding in the second half of the year. Even after a late recovery, the S&P 500 will still post negligible gains for the year, he predicted, ending at 3,900 points against the December 2022 close of 3,839.
In the report, he warned of optimism based on a pause in the cycle of Fed rate hikes and the belief that the US economic collapse will prove to be just an illusion, which is controlled by $6 trillion in new liquidity pumped by global central banks. into the economy from October.
“As investors reach higher levels, there is now talk of a ‘no bankruptcy’ scenario – whatever that means,” he wrote. “This is the trick that the death zone plays on the mind – one begins to see and believe in things that are not there.”
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