Chief investment officer at Morgan Stanley, Mike Wilson, thinks stocks will have a difficult third quarter for three reasons, according to Business Insider.
The first reason is that it’s very likely that The Federal Reserve will cut interest rates in July. Rate cuts are usually a positive thing for investors, but Wilson thinks that the cut is happening too late.
“If the Fed is beginning a new full-blown rate cycle, equity markets typically respond negatively until the Fed can get ahead of the slowdown. In other words, if the U.S. economy is about to enter a recession, the initial Fed cuts are typically viewed poorly by stocks,” Wilson explained.
Wall Street’s poor earnings in the second quarter are another reason. Earnings for the S&P 500 are predicted to drop 2% year-over-year, and profits for U.S. small caps are predicted to fall 12%. Wilson says this doesn’t seem like a big enough drop.
“With our view that a recession is looking more likely over the next 12 months, it’s also likely that company earnings guidance for the next 12 months is too high. Given the significant deterioration in the macro data over the past few months, and the fact that we are now past the halfway point for the year, we suspect companies may feel the need to lower their optimistic, full year earnings guidance provided back in January.”
The third and final reason is that, according to Wilson, the third quarter “tends to be the seasonally weakest for equity markets.”
Wilson says, “As a result of these factors, we expect a 10% correction for global equity markets with potentially worse outcomes for stocks that are crowded, and have performed well over past year. This would include high quality stocks, and even some defensive areas that are now overvalued.”
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