Morgan Stanley strategist Mike Wilson says don't be fooled, this is not a new bull market

Published Mon, May 22 202310:31 AM EDTUpdated Mon, May 22 202311:06 AM EDT

The S & P 500 's range breakout last week may not signal a bull market ahead, Morgan Stanley warned. U.S. equity strategist Michael Wilson said that in trading last week, the S & P 500 briefly broke out of its range of 3,800 to 4,200 points that it has traded in the last six months and surpassed February highs. The broad index opened Friday's session at 4,204.15 points. But he said that isn't enough to confirm a new bull market given there are signals warning otherwise. He specifically pointed to poor breadth, to leadership from quality and defense-oriented stocks, and to broad underperformance from cyclical names such as regional banks, small caps and retailers as reasons a bull market likely isn't on the horizon. "Bottom line, from a technical standpoint, last week's price action showed signs of panic buying, in our view," Wilson said in a note to clients Monday. "Rather than a short squeeze, the market was driven by the biggest winners as more market participants convinced themselves the next bull market may have begun and they can't afford to miss it." "In short, we believe this rally will prove to be a head fake like last summer's," he added. .SPX 6M line The S & P 500's last six months Market fundamentals also aren't helping the bull case, he said. Wilson called valuations unattractive, even beyond the biggest stocks, while noting that the median forward price-to-earnings multiple in the index is 18.3 times, which is in the top 15% of historical levels going back to the mid-1990s. Excluding technology stocks, the S & P 500's price-to-earnings multiple is 18 times, still putting it in the top 15% of historical levels. The market is anticipating an earnings reacceleration in the second half of the year that could boost the index. But that conflicts with the firm's estimate of 20% downside to Wall Street's 2023 consensus forecasts, he said. That all comes as threats to the health of the macro economy grow. He said elevated geopolitical uncertainty, the debt ceiling, a tightening of credit standards among regional banks and the path of interest rates are all variables in the market. He said the October low of around 3,500 points was at first expected to be a good place for a bear market rally to begin, but that expectation was abandoned in December with valuations increasingly unattractive. Now, Wilson believes the market is going through a "fairly significant internal correction," with more stocks down than up and an "extreme flight to quality." And that's meant a tricky investing landscape, he added. Wilson said it doesn't make sense for regional banks, energy, materials, retail and transports to perform poorly while pro-cyclical tech stocks near prior highs. Looking ahead, he said disappointing earnings growth could surprise some investors and particularly hurt communication services, technology, consumer cyclical and industrial stocks. — CNBC's Michael Bloom contributed to this report.