Markets

Markets could weaken by mid-2018 amid tax reform's 'horrendous' timing, Morgan Stanley projects

Key Points
  • The S&P 500 could hit 3,000 in the first half of the year, but may see weaker performance in the second half according to one strategist.
  • Morgan Stanley's Mike Wilson said that the "horrendous" timing of tax reform will contribute to this shift.
  • He argues that revenue growth and market expansion are higher quality drivers of earnings growth.
One of the Street's biggest bulls says buy energy now
VIDEO6:1406:14
One of the Street's biggest bulls says buy energy now

The could hit 3,000 in the first half of the year, according to Mike Wilson, chief U.S. equity strategist at Morgan Stanley. But he anticipates lower quality performance in the second half of the year, in part from tax reform timing he described as "horrendous."

"The Senate originally discussed moving this, not doing this until 2018. That would have been smart. Of course, politics got in the way and we accelerated to 2018," Wilson said on CNBC's "Fast Money." "It's like throwing gas on a burning fire, all it does is truncate the cycle."

Wilson was one of Wall Street's biggest bulls in 2017, He sees the index topping out his bull case by mid-year. But the good news ends there.

"I think the market is going to overshoot into the first half of the year. Our bull case is 3,000, which we get in the first half. In the second half, the market realizes this is a lower quality earnings increase," he said.

By no means is Wilson predicting a recession. He argued operating margins will peak this year in 2018, while earnings will continue to rise.

"A tax increase on earnings is a very different type of increase on earnings than what we got the last two years, which was revenue growth and market expansion," he said. You'll see earnings go up but operating margins come down. That's lower quality," Wilson said.

Wilson believes tax reform has more or less been priced into the market already, which keeps him from getting too excited. But he doesn't think ancillary effects, like wage hikes, increased investment and bonuses have been priced in yet. That, he said, could make 2018 very interesting for investors.

"You'll make a lot of money picking stocks or sectors where investors have overestimated or perhaps underestimated the benefits of tax reform," Wilson said.

Morgan Stanley's favorite sectors for 2018 are energy, financials, industrials and technology.

"Of the cyclicals, energy is the best risk/reward, because it really lagged and there's a fundamental story there between supply and demand and earnings revisions," Wilson added.