Investors may need to tighten their seatbelts as the second quarter approaches.
Morgan Stanley’s chief US equity strategist, Mike Wilson, says a near-term retreat in US stocks is likely before the market finds its footing again.
While the longer-term outlook remains constructive, the coming weeks may test the nerves of even the most seasoned traders, he told CNBC in an interview this week.
Wilson believes the S&P 500 will see a notable dip in early April, marking a period of heightened volatility that could shake out “lower quality” names across the board.
Why Wilson expects US stocks to struggle in early April
Wilson’s cautious view is based primarily on a “perfect storm” of geopolitical tensions and macro-economic uncertainty.
On “Squawk Box”, he said the benchmark S&P 500 index could trade as low as 6,300 in early April – representing about a 5% decline from recent levels.
The market has already been reeling since the US-Iran conflict erupted on February 28, sending shockwaves through energy markets that raised oil prices.
Beyond the immediate theater of war, Wilson points to internal fractures in the financial system.
“There’s still risk around rates [and] oil. There’s Fed uncertainty… so all that could weigh on some of the lower quality parts of the market in the short term,” he added.
Additionally, growing anxiety regarding private credit markets has dampened investor sentiment, creating a liquidity-sensitive environment where any “hawkish signal” from the US central bank could trigger a sharp sell-off.
But the bull market isn’t dead yet
Despite his gloomy forecast for the next few weeks, the Morgan Stanley expert isn’t a perma-bear.
The current pullback, he’s convinced, is actually “mature in time and price” – adding that much of the “froth” has already been scrubbed from the system.
To support this, Wilson highlighted that 50% of the Russell 3000 names are already in a technical bear market, having lost at least 20% from their 52-week highs.
Crucially, he maintains that recession risks remain low – a distinction he dubbed vital for investors.
Why? Because if there’s no recession on the horizon, the current dip is merely a “correction in the context of a broader bull market” rather than the start of a multi-year collapse.
By framing the April slide as a healthy reset, Morgan Stanley suggests that the market is essentially building a base for its next leg higher – allowing valuations to catch up with the reality of steady, albeit volatile, economic growth.
Navigating the storm: what to buy amidst this volatility
For those looking to put capital to work during this turbulence, Mike Wilson revealed his “Fresh Money Buy List.”
The strategy involves moving away from speculative plays and toward names with strong balance sheets and clear catalysts.
Wilson specifically highlighted Walmart, Delta Air Lines, and Northrop Grumman as top picks – all of which carry an “overweight” rating.
Walmart has proven its mettle by rising 14% this year, acting as a defensive powerhouse even after cautious earnings guidance.
Delta Air Lines offers a “recovery play” despite losing 10% this month due to jet fuel costs and DHS funding issues.
Northrop Grumman is seeing unprecedented demand due to the US-Iran war, making it a natural hedge against geopolitical risks that are currently hurting the S&P 500.
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