Stocks are headed into risky territory as the Fed keeps its monetary policy tight, according to Morgan Stanley's chief stock strategist Mike Wilson.to hit the market, warned there could be more downside risks as the Fed continues to keep monetary policy restrictive.
While the central bank has infused the banking system with more liquidity after the collapse of Silicon Valley Bank in March, the containment of that stress so far suggests there's no need to relax monetary policy any further. "Markets often reprice late in the cycle when they realize that Fed policy is not accommodative enough to compensate for the slowing growth backdrop," Wilson said in a note on Monday."While the containment of the regional banking stress is clearly a positive in and of itself, it may also mean that policy expectations for '23 may become less accommodative – via both the liquidity channel and the rates channel.
"It's not surprising that investors have been unwilling to sell into 1Q results as they believe this is as bad as it gets. We would agree with that conclusion if we believed the consensus forecasts," Wilson warned."Unfortunately, our forecasts are more pessimistic, and we don't expect the trough rate of change EPS growth quarter until 3Q or 4Q."
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