With the year coming to a close Wall Street's equity strategists are releasing their predictions for the coming year.
But Morgan Stanley's Michael Wilson said that forecasting right now is more difficult than usual. The chief U.S. equity strategist for the firm said predicting even just the end of this year — let alone the entire 2020 — is especially difficult given all of the unknowns like the state of the ongoing trade negotiations between the United States and China.
"Forecasting the next two months, let alone a year, is hard, and uncertainty bands grow through the year," Wilson wrote in a note to clients Monday.
"We could see growth surprising to the upside or the downside, depending on a number of uncertain outcomes on trade and rates," he said. "Uncertainty means rotations should continue and their durability will depend on whether growth is accelerating or decelerating. We expect the market to vacillate between a pro-cyclical outcome and a defensive one as data come in and trade tensions and the election evolve," he added.
In the near-term he said that stocks could rise as year-end seasonality and central bank liquidity support equities. But by April "the liquidity tailwind will fade and the market will focus more on the fundamentals, where uncertainty is higher than normal." Additionally, given stocks' recent run higher overall market sentiment as well as technical levels are beginning to look a little stretched.
"Headed into 2020, we distinctly had the sense that the optimism on global growth and what it means for markets is more of a show-me story from 2H on as the initial inflection in growth will need to be sustained, and that is harder to do given a still late cycle environment," he said.
Soon, a subdued earnings outlook and deteriorating fundamentals will begin to take their toll and stocks will fall. His 2020 year-end target for the S&P is 3,000, which is about 4% below where the S&P is currently trading.
Wilson said that he believes a trade deal is likely. While the exact details are difficult to predict, he said it will probably "end with a benign market outcome."
Once this uncertainty hanging over the market is removed, global growth should accelerate.
But one place that won't exhibit growth is the United States. Morgan Stanley continues to have an underweight rating on U.S. equities based on the belief that growth will only "stabilize," so investors should look abroad where valuations are cheaper and earnings growth could lead to greater upside.
The firm has relative overweight positions on Japan and Emerging Markets.
Going into 2020 Wilson said the outlook for the year ahead is less certain than in prior years given "more developed trade tensions, an election, and a weaker US economy."
″We believe the US economy will muddle through in 2020, but expect EPS growth to disappoint," Wilson wrote on Nov. 18.
The firm prefers value over growth, since the latter is increasingly a "crowded source of funds."
- CNBC's Michael Bloom contributed reporting.