Morgan Stanley's Mike Wilson says stocks' rally is over until economic growth picks up

Mike Wilson – While stocks rallied for much of last year, he expects changing views on the economy to trigger stock market „twists and turns” throughout the year. Christopher Goodney – Bloomberg via Getty Images

According to Morgan Stanley's Michael Wilson, U.S. stocks will only resume last year's 24% rally if economic growth picks up.

The S&P 500 has started 2024 on the back foot, snapping a nine-week rally as traders dial back some of their enthusiasm for the timing and magnitude of U.S. interest rate cuts. Wilson – Who Rough Stocks rallied for much of the past year – with changing views on the economy expected to trigger stock market „twists and turns” throughout the year.

„This suggests a trading range until the outcome is more concrete,” he wrote in a note. „For equity prices to rise materially from here growth will need to accelerate again (while rates remain relatively restrained).”

As a result, he recommends focusing on single stocks, factors and sectors rather than cap-weighted indices.

Wilson laid out three possible scenarios for the U.S. economy this year. The first – currently mostly seen – is a soft landing with muted real growth and falling inflation. In this scenario, the barbell strategy of defensive growth stocks and late cycle cycles will continue to perform well.

The other effect is a soft landing that accelerates nominal growth. According to Wilson, this positive outlook has gained momentum since last month's US Federal Reserve meeting. The final scenario is a hard landing, with several soft and hard macro data series historically showing recession odds are currently above average. Against this backdrop, traditional defense methods work best, he said.

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Other Wall Street strategists are warning that U.S. stocks should pause after last quarter's sharp gains. However, Goldman Sachs Group Inc. And many, including Bank of America Corp, expect the S&P 500 to hit a new record this year. More recently, RBC Capital Markets strategist Lori Galvacina raised her target to 5,150, which would see the index increase 10% by 2024.

Wilson has maintained a 2024 target of 4,500 for the S&P 500 since November. The index closed Friday at 4,697 points.

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