They say what goes up must come down. But if you look at the stock market today, the decline is rapid and it may be about to recover.
“We think now is the time to consolidate gains,” Mike Wilson, Morgan Stanley’s closely watched chief investment officer, told Yahoo Finance editor-in-chief Brian Sozzi on his Opening Bid podcast (watch the video above or listen here).
Wilson expects stock prices to fall 10% in the third quarter, due to low trading volume over the summer and high concerns about the November presidential election.
Overall, the market has ignored Wall Street’s correction signals for most of the year.
The S&P 500 is up 14% so far this year amid strong corporate earnings and expectations of rate cuts this fall. The Nasdaq Composite is up 13% this year, fueled by AI optimism. And the Dow Jones Industrial Average is up a respectable 6%.
But cracks are beginning to appear in the nonsensical proposition.
The Nasdaq has fallen nearly 3% over the past five trading sessions amid valuation concerns, mixed results from Alphabet (GOOG, GOOGL) and outright poor earnings from Tesla (TSLA).
Market darling Nvidia (NVDA) has fallen more than 5% over the past five days, while rival AMD (AMD) has lost about 10%.
The S&P 500 is down about 3% over the past 10 days, while the Nasdaq is down more than 6%.
Wilson expects these cracks to widen further in the short term, further depressing stock prices.
He points out that the ISM Manufacturing Index is still “in contraction territory.” The problems in the manufacturing sector are easing, but the services sector, which still makes up 70% of the economy, is now “substantially weak.”
“Where we are now is a late [economic] “We still ride bikes,” Wilson adds.
As economic growth worsens, Wilson notes, stock prices are rising “on hopes that the Fed will ease policy.” That’s an unwelcome backdrop for investors to pile into stocks, Wilson says.
And so it is with the fact that the government ‘spends large sums of money on fiscal policy to keep things going.’
The sell-off in AI stocks could also continue, further damaging overall market sentiment.
“We believe AI will lead to productivity increases over time, but expectations have been running ahead of the timing of this development,” Wilson said.
Wilson is not alone in being pessimistic about the short term.
Veteran Truist strategist Keith Lerner says the “corrective period” in tech is far from over. He lowered his view on tech stocks in June.
Lerner added: “This more erratic market action of late is consistent with our expectations and is expected to continue. Our base case is that the long-term bull market remains intact, but it is often two steps forward, one step back.”
Three times a week, Yahoo Finance Executive Editor Brian Sozzi fields insightful, market-focused conversations and chats with the biggest names in business on Starting bid. Find more episodes on our video hub. Pay attention to your preferred streaming service. Or listen and subscribe to Apple Podcasts, Spotifyor wherever you find your favorite podcasts.
In the Opening Bid episode below, EMJ Capital founder Eric Jackson argues that Nvidia’s stock price should double despite valuation concerns.
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