They say that what goes up must come down, but in the case of the current stock market, the decline has been rapid and shows signs of stabilizing at any moment.
“We think now is the time to consolidate gains,” Morgan Stanley’s high-profile chief investment officer, Mike Wilson, said on “The Opening Bid” podcast with Yahoo Finance editor-in-chief Brian Sozzi (see the video above or listen here ).
Wilson believes stocks are headed for a 10% correction in the third quarter due to thin trading volume over the summer and growing concerns about the November presidential election.
Overall, the market has avoided calls for a correction from Wall Street for most of this year.
The S&P 500 is up 14% so far this year, driven by strong corporate earnings and hopes of interest rate cuts this fall. The Nasdaq Composite Index is up 13% this year, buoyed by AI-driven optimism, and the Dow Jones Industrial Average is up a respectable 6%.
But cracks are beginning to appear in the bullish narrative.
The Nasdaq has been hit about 3% over the past five trading sessions due to valuation concerns, mixed results from Alphabet (GOOG, GOOGL) and apparently weak earnings numbers from Tesla (TSLA).
Market darling Nvidia (NVDA) has fallen more than 5% over the past five days, while rival AMD (AMD) has fallen about 10%.
Over the past 10 days, the S&P 500 has fallen about 3%, while the Nasdaq has fallen more than 6%.
Wilson expects these rifts to widen in the near future, further weighing on stock prices.
He noted that the ISM manufacturing index remains in “contraction territory.” Manufacturing woes have eased, but the services sector, which still accounts for 70% of the economy, is now “significantly” weaker.
“We are late [economic] “The cycle is still there,” Wilson added.
Wilson points out that as economic growth weakens, stock prices rise “on the expectation that the Fed will ease policy,” which he says is an unwelcome backdrop for investors to get into the stock market.
And so is the fact that governments are “spending a lot of money on fiscal policy to keep things on track.”
There is a risk that AI-related selling pressure will intensify further, further worsening overall market sentiment.
“We believe AI will lead to productivity gains over time, but expectations are ahead of the timing of this development,” Wilson said.
Wilson isn’t the only one who is bearish in the short term.
The tech industry is still in a “correction period,” said veteran Truist strategist Keith Lerner, who downgraded his view on tech stocks in June.
Lerner added, “Recent market volatility is in line with our expectations and is expected to continue. Our base case is that the secular bull market is here to stay, but it often comes down to two steps forward and one step back.”
The story continues
Three times each week, Yahoo Finance Editor-in-Chief Brian Sozzi holds insightful, market-focused conversations and chats with some of the biggest names in business on Opening Bid. Check out more episodes on our video hub, available on your favorite streaming service, or listen and subscribe on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.
In the Opening Bid episode below, EMJ Capital founder Eric Jackson makes the case that Nvidia shares will double despite valuation concerns.
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