Morgan Stanley Says US Stock Market Rally This Year Is Not A Signal for New Bull Market and Warns of Fundamentals

Morgan Stanley chief U.S. equity strategist Mike Wilson warned that investors should not mistakenly believe that the stock market rebound this year marks the beginning of a new round of bull market.

Wilson, usually one of the most pessimistic bears on Wall Street, said on Monday (May 22) that he did not expect the stock market's strength to continue, even though the S&P 500 topped 4,200 for the first time in more than six months last week.

"Can this confirm the start of a new bull market? The answer is no," Wilson said in a research note.

The strategist's base case is that optimism surrounding the rise of artificial intelligence and the Fed's policy shift has overshadowed "a number of technical signals and fundamentals" that suggest stocks won't be entering a prolonged period of rise.

U.S. stocks have been on the rise since 2023, with the S&P 500 up 9% so far this year and the Nasdaq Composite up 21%.

Most of these gains have been driven by a small group of big tech stocks, including Microsoft, Meta, Nvidia and others. They are driving the stock market higher on the back of interest in ChatGPT and artificial intelligence.

Wilson said that even though artificial intelligence might help companies cut costs in the future, it would not be enough to prevent the "destiny" of a sharp drop in corporate profits later this year.

He noted, “While we believe AI is real and could bring some substantial efficiencies that could help fight inflation, it is unlikely to prevent our forecast of an earnings recession this year.”

In addition, market participants' expectations that the Federal Reserve will soon end its tightening policy also boosted stocks. When interest rates stop rising and start falling, business borrowing costs fall and demand tends to pick up, which tends to boost earnings. And lower interest rates also make stocks more attractive.

That factor may again be distracting investors from an impending earnings slowdown that could hit stocks later this year, Wilson said.

He also wrote in the report, "Fed officials are close to a policy adjustment or interest rate cut, which may drive stocks away from weak fundamentals."