Don’t expect another bull run anytime soon, says Morgan Stanley strategist

Lisa Shalett

'We really hit a wall at the end of July, and that's when the market really put in its year-to-date highs,' says Lisa Shalett.

Investors may not want to bet heavily on an autumn stock surge as the fuel behind this year’s rally runs low, said Lisa Shalett, chief investment officer for wealth management at Morgan Stanley.

The S&P 500 Index has jumped more than 16% so far in 2023, a refreshing turnaround for investors in the wake of last year’s drop of 18%. Shalett has remained cautious throughout the market’s bull stampede, wary of the rally’s fundamental underpinnings.

The market’s momentum, however, has waned over the course of the summer. The question now is whether stocks can get their mojo back this fall.

“Our best guess is that we’re going to move sideways and churn around,” Shalett said in an exclusive InvestmentNews interview. “Our sense is that we really hit a wall at the end of July, and that’s when the market really put in its year-to-date highs.”

In July, it became clear that the end of the Fed rate hiking cycle was near, as well as the easy comparisons on inflation, Shalett said. Also fading this summer was the influence of the so-called “magnificent seven” tech stocks on the index, as the ballyhoo over generative AI started to fade.

Further dampening the performance of both big-cap tech and stocks in general was the spike in the 10-year Treasury yield, now above 4.3% and up more than a full percentage point from this April.

“Interest rates may be near their peaking point and that may give stocks a little bit of relief, but as long as you’ve got interest rates that are this high, it’s very hard to kind of expand multiples. And it comes down to only earnings that can drive the bus when interest rates are at this level,” Shalett said.

In her view, Wall Street strategists remain overly rosy with their forward earnings estimates. Although she appreciates their belief that the consumer remains both employed and actively spending, she still thinks S&P 500 consensus earnings remain out of reach.

“Some of the bulls have said, ‘OK, I can put a 20 multiple on $250 in earnings and get to my 5,000 target price on the S&P 500 and I’ve got double-digit gains from here,’” Shalett said. “We continue to be skeptical of that view, really worrying that the consumer cools in 2024, that government spending gets under control a little bit, certainly on a sequential basis as we go into an election year and people start debating U.S. debt and deficits, which, as we know, have come in hotter than we thought.”

So with all these concerns piling up, shouldn’t stocks be poised to climb Shalett’s proverbial “wall of worry” as the old Wall Street adage says, as opposed to moving sideways and churning around?

“One of the great things about 2023 is that we came into the year with everyone expecting a recession,” Shalett said. “Now that the recession didn’t happen, now we have everyone expecting a re-acceleration in 2024. So with expectations high, our worry is that now is when you actually get the disappointment.”