![]() Like Wilson, Kolanovic essentially believes higher interest rates will eventually catch up with financial markets. While we think AI has been and will continue to be a transformative technology, the current hype was triggered by popularisation of chatbots that often fail in basic questions and occasionally fabricate wrong answers to more complex questions.” ![]() “This could be indicative of a bubble, and other anecdotal evidence points to an AI-driven bubble as well. He believes the market has been driven higher largely by “mechanical re-risking, due to the decline in volatility and emergence of the AI-themed mega-cap rally” that has made the market incredibly concentrated. JP Morgan’s chief strategist, Marko Kolanovic, remains defiant, declaring the rally over the last two months “implies macroeconomic scenarios that are even more positive than a soft landing”. “With price being the main factor that has held sales growth above zero for many companies this year, it would be a material headwind if that pricing power were to roll over,” Wilson says. ![]() While Wilson is an AI believer, he doubts that the market will enjoy an AI earnings boost this year, and the tech sector sales could be at risk of a slowdown as companies cut costs.īut his biggest argument is that falling inflation will hurt earnings because top-line sales will fall while costs rise. Wilson certainly hasn’t given up on his hypothesis that earnings and share prices are likely to come under pressure in the second half of the calendar year, as many of the tailwinds of the first half – warmer weather to start the year, the resilience in consumer spending (partly buttressed by surging credit card balances), the suspension of the repayment of student loans and the injection of liquidity following the US banking crisis – unwind in the second half. But has Wall Street’s biggest bear truly rolled over? The S&P 500 is now trading on a price-to-earnings multiple of 20 times forward earnings, a level that Goldman Sachs says has only been surpassed in the past 40 years during the 2020 tech bubble (a peak of 25 times) and the COVID-FOMO frenzy (a peak of 23 times).Īs Wilson now concedes, 2023 “has been a story of higher valuations than we expected amid falling inflation and cost-cutting”. Throughout this rally – the S&P 500 is now up 26 per cent from its lows last October, and incredibly within about 4 per cent of its record high in late 2021 – Wilson has remained stubbornly bearish, arguing that equities have been priced for perfection at a time when earnings would have to crater under the weight of slowing earnings.īut while earnings have been under some pressure – projections for the June quarter earnings season have actually been slashed by 12 per cent in recent months, meaning the bar that companies are “beating” is much lower than it was – investors have remained steadfastly focused on the hype in AI and the steady drop in inflation. To top it all off, an incredible surge in interest in generative artificial intelligence has propelled the so-called magnificent seven tech stocks – Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia and Tesla – to a position of sharemarket dominance not seen in 60 years, since the days of the “Nifty Fifty”. Instead, US markets have rallied hard on a sort of Goldilocks environment: resilient economic activity, strong pools of savings, steadily declining inflation and better-than-expected earnings growth. Wilson joins a litany of strategists who have been forced to embrace the risk-on rally and increase their year-end targets for the S&P 500, having been part of the near-unanimous consensus that the global proxy for risk would fall in the first half of calendar 2023 as higher interest rates translated into slower economic growth and falling corporate earnings. ![]() Morgan Stanley’s Mike Wilson says the rise in market valuations has surprised him. However, the upside move in equity multiples on the back of this theme … has gone further and persisted longer than we anticipated – ie we were wrong.” “Last October, we based our tactically bullish call on the view that inflation was peaking along with back-end rates and the US dollar. But after months of predicting that Wall Street’s rally would turn out to be a bear market trap, Morgan Stanley strategist Mike Wilson has accepted defeat. ![]() They’re the hardest words to say in financial markets. ![]()
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