Wall Street Big Short: Unlikely for US stocks to collapse across the board, but limited upside potential

According to Mike Wilson, one of the largest short sellers on Wall Street and from Morgan Stanley, despite facing seasonal headwinds and uncertain growth prospects, the likelihood of a complete collapse in the US stock market is low. However, these factors may limit the upside potential of the US stock market for the remainder of this quarter.

Finance and Economics News App learned that Wilson accurately predicted the recent decline in the US stock market in July. He believes that despite last week's sell-off keeping traders on edge, there won't be a massive market crash. This view contrasts sharply with Wilson's bold bearish forecasts that have made him famous in recent years. Nevertheless, he still believes that the S&P 500 Index has almost no room for upside and expects the index to fluctuate between 5000 and 5400 points—about 7% lower than Tuesday's level at the lower end, and roughly flat at the upper end.

In an interview on Tuesday, he stated, "I find it hard to believe that we will break through the highs again, and I don't think the stock market will collapse completely in a way that signals a new bear market."

Wilson pointed out that with the S&P 500 Index already up more than 13% this year, slowing economic growth, overly optimistic profit expectations, and the Federal Reserve's "passive" stance on rate cuts have created a challenging environment for further gains. He believes that there are more opportunities in individual stocks than in the overall index and reiterated his recommendation to buy so-called defensive stocks, a view that goes against the mainstream belief of most investors who continue to follow the rise of tech stocks.

He said, "I find it hard to get excited about the index, which is why we are very focused on opportunities at the individual stock and industry levels to find profit potential." He also mentioned that current market valuations are high.

In the past month, the US stock market has been shaken by concerns that the Federal Reserve may not be cutting rates fast enough, with market worries that this could lead to a sharp slowdown in the US economy. Last week, the S&P 500 Index recorded both its best and worst single-day performances since 2022, ultimately closing flat over the five trading days.

On July 9th, Wilson had suggested that a 10% pullback was "very likely." A week later, on July 16th, the S&P 500 Index hit a new high, but then fell by 8.5%, reaching a short-term low on August 5th. Since then, the index has rebounded by over 4%.

On Tuesday, the US stock market rose as data showed that the Producer Price Index (PPI) rose less than expected. The next major challenge for traders is the release of the Consumer Price Index (CPI) on Wednesday morning.

Wilson continues to advise investors to stay away from the small-cap Russell 2000 index, calling its rebound last month driven by a so-called "de-leveraging" process, where investors pulled funds out of large-cap tech winners and covered their short positions in small-cap stocks. He pointed out that the negative technical patterns seen in small-cap stocks indicate that the July rise in this group was only a "one-off" event.

However, this does not mean that traders should completely avoid small-cap and mid-cap stocks. He added that investors should stick to selecting high-quality companies with strong fundamentals when looking for opportunities in these groups.

Wilson reiterated his view that the market is still in the late stages of the cycle, with the Federal Reserve preparing to ease policy in September. He said, "The current strategy is to stay in high-quality assets and lean towards defensive rather than growth, as rate cuts are most beneficial for this type of stock."