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Morgan Stanley sticking by bear call for 2019, sees profits disappointing

Key Points
  • Morgan Stanley's Mike Wilson isn't changing his mind about an earnings recession.
  • "The risk is that the profits recession turns into corporate behavioral change, which then leads to further economic slowdown," he says.
  • He's sticking with his 2,750 year-end target for the S&P 500.
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Morgan Stanley's Mike Wilson is sticking by his bear call — and isn't changing his mind about an earnings recession.

"The earnings profit recession is real," he told CNBC on Monday.

"The mistake was not the Fed tightening last year. The mistake was … the timing of the fiscal policy stimulus, which overheated the economy last year."

Wilson, the firm's chief U.S. equity strategist, has repeatedly warned that investors could be caught in a "rolling bear market " for the next several years. In February, he said that the long-awaited earnings recession had arrived but that investors were still too optimistic.

Indeed, optimism has reigned so far this year. The S&P 500 has had its best start to a year since 1998. The index gained 13.1 percent in the first quarter — its strongest quarterly performance since 2009.

Jacob W. Frank | Getty Images

Stocks rallied once again on Monday after strong U.S. manufacturing data was released and China eased concerns about a possible global slowdown. The Dow Jones Industrial Average closed 329.74 points higher at 26,258.42, while the Nasdaq climbed 1.3 percent to 7,828.91. The S&P 500 rose 1.2 percent to 2,867.19.

Wilson, however, isn't changing his 2,750 year-end target for the S&P.

He says earnings forecasts still have to come down by about 5 percent for the next 12 months. He blames margin pressure, which is being seen in labor, capital expenditures and inventory.

"The risk is that the profits recession turns into corporate behavioral change, which then leads to further economic slowdown," Wilson warned on "Closing Bell. "

"The Fed understands that. That's why they have been so aggressively here pivoting and even hinting at the idea that their next move could be a cut."

"They are actually concerned," he added. "Confidence … was pretty weak in the fourth quarter last year, and they want to make sure it doesn't tip over to a recession."

In March, the central bank indicated there would be no more rate hikes this year but did not indicate rate cuts would be necessary. In December, the Fed had estimated two increases would be appropriate in 2019.

While President Donald Trump and his top economic advisor, Larry Kudlow, have called on the Fed to cut rates, Wilson said a 50 basis point cut wouldn't change the earnings profile.

Wilson was the most accurate Wall Street strategist tracked by CNBC in 2018. He's issued a streak of bearish calls about the S&P 500 and earnings performance over the past year.

— CNBC's Fred Imbert and Tom Franck contributed to this report.

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