Here's the Next Risk for Stocks: Morgan Stanley

Morgan Stanley’s Michael Wilson — among the most prominent bearish voices on U.S. stocks — says turmoil in the banking sector has left earnings outlooks too high, putting sanguine stock markets at risk of sharp declines.

“Given the events of the past few weeks, we think guidance is looking more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes,” Wilson wrote in a note on Monday.

Financials and consumer retailers are among sectors that have already started to reprice, with valuations declining enough to present investment opportunities, Wilson said in an interview with Bloomberg Surveillence on Monday.

“We’re looking for opportunities at the stock level, but at the index level, it does not look attractive to us,” he said.

While Wilson, the bank’s top equity strategist, predicts stocks will head lower as earnings estimates and valuations continue to fall, he does not anticipate equities to hold at their lows for long.

“Whatever we’re going to get here in the next three to six months in terms of finally resetting the valuations appropriately and getting estimates down, I don’t think we’re going to stay at very, very low price levels for a very long time,” Wilson said. “We’re not in the camp that we’re in a secular, structural bear market — this is a cyclical bear market that has some completion to it.”

The strategist — who ranked No. 1 in last year’s Institutional Investor survey after he correctly predicted the selloff in stocks — attributed the heightened risk of equities repricing to the divergence in stock and bond market action this month.

Whereas bond volatility has spiked as investors priced in a potential recession following the collapse of a slate of regional U.S. lenders, equities have recovered losses on bets of intervention from policy makers.