Don’t let the ‘bear market house of mirrors’ fool you, Morgan Stanley’s Mike Wilson warns of the stock market

NEED TO KNOW Stock futures are treading water ahead of an important week for earnings, with the spotlight on updates from the tech space, which has been laying off

thousands of workers. Among those not expecting good news in the earnings pipeline is Morgan Stanley’s chief U.S. equity strategist Mike Wilson, who in our call of the day

says investors need to beware of the “bear market hall of mirrors.” A fairly upbeat start for stocks to the year — the S&P 500 is up over 3% this year, and the

beaten-down Ark Innovation ETF has jumped 17% — is not tempting him. “Suffice it to say, we’re not biting on this recent rally because our work and process are so convincingly

bearish on earnings,” said Wilson. He notes how the early 2023 rally has been led by “low-quality and heavily shorted stocks” and a strong shift to cyclicals versus

defensives. “This cyclical rotation in particular is convincing investors that they are missing the bottom and must reposition,” he told clients in a Sunday note. But he

warns that bear markets can fool lots of investors before all is said and done, and they must keep trusting their own processes and ignore the noise. “The final stages of the bear

market are always the trickiest and we have been on high alert for such head fakes, like the rally from October to December we anticipated and traded,” Wilson said. After a

“very challenging 2022, many investors are still bearish fundamentally, but question whether negative fundamentals have already been priced into stocks,” he says. “Our view has

not changed as we expect the path of earnings in the U.S. to disappoint both consensus expectations and current valuations.”