- The stock market is having an oversized influence on how investors think about the economy.
- That's according to a Monday note from one of Wall Street's top bears, Mike Wilson of Morgan Stanley.
- "Markets are now expecting a meaningful re-acceleration in growth that we think is unlikely this year."
The stock market is having an oversized influence on investors' view of the economy, signaling a late-stage economic cycle that typically ends in a recession.
That's according to Morgan Stanley equity strategist Mike Wilson, who has been a vocal bear this year, despite the S&P 500 jumping nearly 20%.
"Late in the cycle when the data is conflicting, sentiment can be influenced by stock prices more than usual. We think the pendulum swung too far this summer and that a risk-off complexion is likely with us in September," he said in a Monday note.
Investors have been pretty temperamental when it comes to their thinking on how imminent a recession actually is. The recession narrative has swung back and forth between hard landing, soft landing, and no landing at all, and the ongoing stock market rally has reinforced some of the more bullish views of the economy.
But the stock market rally has been driven by hard economic data and corporate earnings, too. The unemployment rate remains near a multi-decade low, inflation readings have been cut in half from their June 2022 peak, and a resilient consumer is still spending. Meanwhile, first-quarter and second-quarter earnings results proved better than Wall Street feared.
But Wilson is sticking with his view that a lot of the economic bullishness among investors is being driven more by stock prices and less by economic data.
"In late cycle environments, it's very typical for investors to swing back and forth between soft and hard landing outcomes," Wilson said. "At current prices, markets are now expecting a meaningful re-acceleration in growth that we think is unlikely this year, especially for the consumer."
Wilson highlighted that a recent survey of consumers by Morgan Stanley showed that consumer confidence in the US economy is not improving relative to last month. Inflation remains the top concern, and the only category where consumers expect to spend more money over the next six months are essentials like groceries and household supplies.
"We saw notable declines in spending intentions for small appliances, consumer electronics, and durables," Wilson said, adding that consumer spending plans for international travel also fell from month-to-month.
"We can't help but remain skeptical that economic growth is accelerating... at this stage in the cycle, the economic data can be conflicting and uncertain for both the bulls and bears. During such periods, price action tends to influence sentiment and positioning more than normal," he warned. "We think the optimism should be faded."
Wilson recommended investors focus on owning defensive growth stocks, particularly industrial stocks relative to consumer discretionary stocks.
"The industrials sector has a strong late cycle outperformance track record relative to consumer discretionary," he said.