Morgan Stanley sees mood on US stocks souring, Goldman disagrees

Two of Wall Street’s top strategists are at odds about the outlook for US stocks following a three-week run of declines as debate rages over whether the economy can avoid a recession.

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While Morgan Stanley’s Michael Wilson — a stalwart equity bear — says sentiment is likely to weaken further if investors are starting to “question the sustainability of the economic resiliency,” his counterpart at Goldman Sachs Group Inc., David Kostin, says there’s room for investors to further increase exposure if the economy stays on course for a soft landing.

Goldman’s equity sentiment indicator — which measures nine positioning metrics including the exposure of hedge funds, demand by foreign investors and fund flows — dropped last week after climbing since December. In a note, Kostin said he expects the decline to be “short-lived” and that hedge funds, mutual funds and retail traders would all increase bullish bets if the “market environment continues to improve.”

Wilson, on the other hand, said stock investors had now become too optimistic about a soft landing. He said cooling inflation had crimped Corporate America’s ability to raise prices, and that would stand to get worse through the year if consumer demand fades.

Moreover, “it’s fair to say that we just don’t know the answer to the question, yet, in terms of a soft landing outcome and an associated rebound in pricing power,” Wilson wrote in a note. “We believe the ‘risk off’ complexion of markets will remain with us possibly well into the fall/winter should fundamentals deteriorate as we expect and the market does not.”

Wilson correctly predicted the slump in stocks last year, and has stuck to his bearish view this year even as the market rallied.

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