Morgan Stanley's Chief US Equity Strategist, Mike Wilson, is forecasting a potential 7% drop in US equities in the near term, as long-dated US Treasury yields continue to rise, fueled by inflation fears and increasing energy prices. He notes that the 30-year Treasury bond yield soared to 5.19% recently, its highest in three years, which historically prompts investors to move away from stocks towards safer US Treasuries.
Wilson's primary concern revolves around the price of oil, stating that if crude oil prices reach $120, $130, or $140 per barrel, it would significantly drain market liquidity. He described current market liquidity as adequate but not abundant, making it vulnerable to such shocks, especially when combined with a busy schedule of corporate fundraising. Despite this short-term bearish outlook, Wilson remains long-term bullish on equities, predicting the S&P 500 could reach 8,300 in 12 months, driven by an anticipated earnings recovery and the AI CapEx cycle.
While Wilson warns of a correction, he is not advising clients to sell their equity holdings. Instead, he suggests a rotation within portfolios towards companies with strong free cash flow and internal cash generation, to better withstand higher borrowing costs and energy prices. He favors high-quality US equities, particularly the S&P 500, and specifically mentioned Microsoft, Visa, JPMorgan Chase, and ExxonMobil as fitting his investment criteria due to their robust financial health and ability to hedge against rising oil prices. He also recommends avoiding long bonds due to elevated interest rates.
