US stocks ‘to hit bumps’

Investors chasing the US equity rally should pull back as the S&P 500 Index bumps up against key technical levels on charts and the earnings season will probably bring more bad news, warned Mike Wilson, Morgan Stanley’s chief US equity strategist.

US stocks ‘to hit bumps’

Investors chasing the US equity rally should pull back as the S&P 500 Index bumps up against key technical levels on charts and the earnings season will probably bring more bad news, warned Mike Wilson, Morgan Stanley’s chief US equity strategist.

That double hurdle is likely to send the S&P 500 back to its December lows at around 2,350, Wilson said in a research note.

It faces challenges around the range of 2,600 to 2,650, “which is a good level to start lightening up,” he said.

The benchmark gauge came within five points of 2,600 for a third day in a row through last week.

“The issues we still need to deal with include the fact that we are in the midst of a fairly steep and broad negative earnings revision cycle, and there is significant technical resistance-overhead not far above current prices,” Wilson wrote in a note to clients.

“We expect upcoming negative data will prove 2,600 to 2,650 to be a good sale before a proper retest of the December lows,” he said.

US stocks weakened as China trade data showed a worse-than-expected slump and Citigroup kicked off the fourth-quarter reporting season with lacklustre results.

While Wilson has predicted a 50% probability of S&P 500 earnings suffering two-quarters of declines this year, he said the fourth-quarter rout that sent stocks to the brink of a bear market largely reflected the expected recession.

Once the market revisits its December lows on less momentum and better breadth, investors should consider buying cyclical stocks that were hit the hardest during the recent slump, such as energy shares, according to Wilson.

“We are likely to experience a rolling bottom as a prelude to the next bull market on a first-in, first-out basis. That means early cycle stocks and regions that tend to do well once a recession is priced,” he wrote.

“Wait for the retest and look to buy the cyclicals,” he said.

A recent rally in stocks, fuelled by US-China trade optimism and hopes of a slow pace of interest rate rises, has driven a 10% gain in the S&P 500 from its Christmas Eve low.

The benchmark index is about 12% away from its September 20 record close.

“Obviously the biggest concern is the China trade data and people are seeing it in terms of a global synchronised slowdown that is potentially picking up,” said Yousef Abbasi, global market strategist at Intl FCStone in New York.

Bloomberg and Reuters

More in this section

Budget 2022 Logo

What impact will this  year's budget have on you and your business.

The Business Hub
Newsletter

News and analysis on business, money and jobs from Munster and beyond by our expert team of business writers.

Sign up
Puzzles logo
IE-logo

Puzzles hub

Visit our brain gym where you will find simple and cryptic crosswords, sudoku puzzles and much more. Updated at midnight every day. PS ... We would love to hear your feedback on the section right HERE.

Lunchtime
News Wrap

A lunchtime summary of content highlights on the Irish Examiner website. Delivered at 1pm each day.

Sign up
Revoiced
Newsletter

Our Covid-free newsletter brings together some of the best bits from irishexaminer.com, as chosen by our editor, direct to your inbox every Monday.

Sign up