Morgan Stanley's Mike Wilson, who's nailed the market this year, says bounce has a bit further to go

Published Mon, Oct 31 202210:03 AM EDTUpdated Mon, Oct 31 202210:37 AM EDT

Morgan Stanley equity strategist Mike Wilson, a prominent market bear who called 2022's sell-off, now believes the comeback rally could last longer if the Federal Reserve turns dovish this week. "Until next-12-month EPS estimates come down meaningfully the rally can continue, particularly if the Fed meeting leads to lower rates," Wilson said in a note Monday. "This week's Fed meeting is critical for the rally to continue, pause or even end completely." The central bank is widely expected to raise rates by 75 basis points on Wednesday for a fourth consecutive time. Wilson said the Fed could signal that it is moving closer to the end of its tightening campaign, an action he believes the market would cheer. The market is in the middle of a big rebound with the Dow Jones Industrial Average notching a four-week winning streak and on track for its best month since January 1976. The S & P 500 rallied nearly 4% last week to end at 3,901.06. Wilson, who won the best portfolio strategist title in the latest Institutional Investor survey, said the rally can reach a range of 4,000 to 4,150 and he's leaning toward the upper boundary. A rally to 4,150 would entail a 6% gain from here. However, Wilson said he will "remain unemotional in the face of poor price action" and use 3,700 as a trailing stop loss. In the beginning of the year, Wilson was one of the very few strategists on Wall Street who predicted a sell-off in 2022. He set his year-end target at 3,900, compared with an average forecast of 4,023, according to a CNBC market strategist survey that rounds out 15 top strategists' outlooks. A big headwind the market faces right now is deteriorating corporate earnings, especially lower guidance, Wilson said. "A combination of slowing consumer spend, FX headwinds, weakness internationally and higher rates has given companies a host of reasons to tone down guidance for the out quarter, if not the out year," Wilson said. Since third-quarter earnings season started in earnest two weeks ago, stock price reactions have been weak historically, with next day performance down 0.6% on average across the S & P 500 and down 1.9% for the 50 largest stocks in the benchmark, Morgan Stanley's data shows.