Morgan Stanley bear Wilson: US stocks to fall 10% by the end of the year, S&P to drop to 3900 points.

One of Wall Street's biggest bears is still sticking to his prediction for this year that the S&P 500 index will end the year at 3,900 points, which means the index will fall more than 10% by the end of 2023.

In a report on Monday, Michael Wilson, the chief US equity strategist at Morgan Stanley, listed a series of reasons explaining why he believes the choppy decline in US stocks since early August may not be over yet.

Since the opening on August 1st, the S&P 500 index has fallen 4.7% as of Tuesday's close, but it is still up 14.4% for the year.

There are still macro concerns. Despite better-than-expected growth in US retail sales in September, survey data from the University of Michigan shows that consumer confidence is weakening. Wilson said that although people are optimistic about the third-quarter earnings season that has just begun, Wall Street stock analysts have started to slightly lower their expectations for corporate earnings growth in the coming quarters and the next year.

Technical factors also influence his judgment. Wilson pointed out that the S&P 500 index seems to be "stuck" between two key support and resistance levels: the 50-day moving average of around 4,420 points and the 200-day moving average of around 4,240 points.

Will the index break through the resistance level or fall below the support level?

Wilson pointed out that Morgan Stanley's clients still expect the market to rebound in the fourth quarter. Many people insist that historically, US stocks tend to rise in the fourth quarter. However, this optimistic sentiment could easily be shaken, triggering another round of selling, as portfolio managers rush to lock in their gains for the year, which could further exacerbate the selling pressure.

Wilson said:

"From our conversations with investors, our sense is that most people still believe that the fourth quarter is more likely to see a rebound. Although confidence levels may have declined in the past week, many still lean towards being long to reduce the risk of missing out. A few large-cap stocks have driven the index higher this year."

"As mentioned earlier, this sentiment depends on short-term price increases; once there is no increase, we may see a rapid shift in positions to lock in profits and/or relative performance before the end of the year."

Although the technical aspect of the S&P 500 index looks healthy enough, beneath the surface, the average condition of the index's constituents appears to be much worse. This is also one of the reasons why Wilson is skeptical about the US stock market entering a new bull market. According to the performance of the equal-weighted S&P 500 index, the constituent stocks of the S&P 500 index have been on average declining this year. The equal-weighted S&P 500 index is calculated based on the S&P 500 index, with each company in the index having a weight of 0.2%.

The equal-weighted S&P 500 index has recently experienced a "death cross" as well, with its 50-day moving average falling below the 200-day moving average, indicating that the downward momentum may continue.

Wilson commented:

"Based on the price trend from the beginning of the year, this may not be a new bull market/cyclical starting point. The equal-weighted S&P 500 and Russell 2000 have been declining this year, and next year may be closer to the bear market low of 2022 rather than the bull market high of 2021.

"In July, the equal-weighted S&P 500 seems to have formed a classic double top, at least from a technical perspective. In addition, only 39% of the stocks in the S&P 500 have prices above the 200-day moving average, which is not surprising given that this year has been challenging. This index has been heavily influenced by a few large-cap stocks with outstanding performance, and the leading position of these large-cap stocks is also shrinking and weakening."

The gains of the S&P 500 index and the Nasdaq Composite index have also declined, while the proportion of stocks below the 200-day moving average continues to deteriorate.

Wilson is not the only one concerned about the weak performance of large-cap tech stocks and the energy sector. The energy sector has benefited from the rise in oil prices in recent months.

Jonathan Krinsky, Chief Market Technician at BTIG, emphasized that the S&P 500 index, excluding the "Big Seven" tech giants, recently hit its lowest level of the year, and the ratio of the S&P 500 index excluding the "Big Seven" tech giants to the overall index has dropped to its lowest level since the end of 2021.

Although the S&P 500 index climbed about 20% by the end of July, reaching a high point in 2023, Wilson has been sticking to his year-end target of 3,900 points. However, he also admitted this summer that his bearish predictions did not come true. Wilson gained acclaim in 2022 for accurately predicting a significant decline in the US stock market. In that year, skyrocketing inflation drove the Federal Reserve to implement aggressive tightening policies, resulting in the worst performance of the US stock market since 2008.