US stocks are in the 'death zone' and could crash 26% within months, Morgan Stanley's top strategist says
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- US stocks have surged too high and are now in a "death zone", Morgan Stanley's Mike Wilson said.
- "Investors have followed stock prices to dizzying heights once again," he warned in a recent note.
- Wilson has predicted the S&P 500 could crash 26% to 3,000 points within months.
US stocks have soared to unsustainable highs – but investors are behaving similarly to climbers who blindly push on towards the top of Mount Everest without properly considering the risks, according to Morgan Stanley's Mike Wilson.
The bank's chief US equity strategist said Sunday that he sees similarities between current valuations and the "death zone" – an area just below the summit of the world's tallest mountain where there is so little oxygen that the human body starts to die, minute by minute and cell by cell.
"Many fatalities in high-altitude mountaineering have been caused by the death zone, either directly through loss of vital functions, or indirectly by wrong decisions made under stress or physical weakening that lead to accidents," Wilson wrote.
"This is a perfect analogy for where equity investors find themselves today, and quite frankly, where they've been many times over the past decade," he added.
In Wilson's metaphor, the death zone represents the excessive levels that stock prices have climbed to since the start of this year.
The benchmark S&P 500 index is up 6% year-to-date, while the tech-heavy Nasdaq Composite has jumped 13% over the same period.
Investors have scooped up stocks as they expect the Federal Reserve will start cutting interest rates by the end of the year. Lower rates tend to lift stock prices because they support higher spending and cheaper borrowing, boosting the future cash flows that make up a core part of companies' valuations.
Wilson has repeatedly warned that the market rally won't last. He expects inflation to prove stickier than many expect, forcing the Fed to hold rates higher for longer to bring soaring prices under control.
"The bear market rally that began in October from reasonable prices and low expectations has morphed into a speculative frenzy based on a Fed pause/pivot that isn't coming," he wrote in his latest note.
Wilson has said since late 2022 that the S&P 500 is likely to bottom out at 3,000 points this year – 26% below the 4,080 points it traded at as of Friday's closing bell.
That's noticeably more pessimistic than most of Wall Street. Some top market voices, including Wharton professor Jeremy Siegel, have voiced support for a bullish "no landing" outlook.
Compared to a "hard" or "soft" landing, in the "no landing" scenario the Fed is able to bring inflation down to 2% without having any real negative impact on the economy, thanks to the scope for rate hikes provided by the US's strong labor market.
That sort of optimism is just another symptom of the death zone, according to Wilson.
"As [stocks] have reached even higher levels, there is now talk of a "no landing" scenario – whatever that means," he said. "Such are the tricks the death zone plays on the mind – one starts to see and believe in things that don't exist."
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