Former Prominent Short Seller at Morgan Stanley: Low Probability of a Comprehensive Collapse in US Stocks

According to Morgan Stanley strategist Mike Wilson's analysis, despite unfavorable seasonal factors and uncertain prospects that may limit the upside potential of US stocks for the remainder of this quarter, the likelihood of a comprehensive stock market crash is very low.

The strategist accurately predicted the recent decline in the US stock market in July, and now he states that due to last week's sell-off, traders are still in a tense state, making a major crash unlikely. This optimistic view contrasts sharply with Wilson's bold bearish comments that have made him famous in recent years.

Nevertheless, Wilson still believes that the S&P 500 Index (SPX) has limited upside potential, expecting the benchmark index to fluctuate between 5000 and 5400 points, which implies a drop of about 7% from Tuesday's trading levels at the lower end and roughly flat at the higher end.

Wilson expects the S&P 500 Index to oscillate within the yellow area.

"I find it hard to believe that we will surge back to highs," he said in a Bloomberg TV interview on Tuesday, "but I also don't think we will completely collapse to the point of thinking the market is entering a new bear market."

Wilson points out that slowing growth, overly optimistic profit expectations, and the Fed's "reluctance to act" in cutting interest rates together create a challenging backdrop for further gains in the S&P 500 Index, which has already risen more than 13% this year.

Wilson sees opportunities in individual stocks rather than the broader index. He emphasizes the recommendation to buy so-called defensive stocks, which is a call that goes against the momentum trading of most investors who continue to chase tech stocks.

Citing high valuations, Wilson said, "I find it hard to get excited about the indices, which is why we are very focused on the individual stock and industry levels to try to profit."

Over the past month, concerns that the Fed may not cut interest rates fast enough to prevent a sharp slowdown in the US economy have hit US stocks hard. Last week, the S&P 500 Index experienced its best and worst two trading days since 2022, ultimately closing the week flat.

On July 9, Wilson warned of a "very likely" 10% correction. A week later on July 16, the S&P 500 Index hit a new high, then fell 8.5% before rebounding over 4% since hitting recent lows on August 5.

US stocks surged on Tuesday as data showed US July PPI lower than expected, with traders facing the next key obstacle being Wednesday's CPI data