Morgan Stanley CIO: There's going to be two or three rate hikes going into June

Joining us now is Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist at Morgan Stanley. And the recent data points, whether it's the CPI, PPI or the jobs numbers, all indicates that a pivot or pause would be unlikely. Do you think that that could change quickly, though, Mike? Good morning, Joe. No, I don't, because, I mean, the Fed has a job to do. They've been very clear about that.

They were slow to start, but they've been very serious in since doing that. Now, we thought there could be a pivot on February 1st, but then, of course, the data came in a bit stronger. And the Fed doesn't want to give any chance to inflation rearing its head again. So we think there's at least two more hikes, maybe three going into June. And, you know, that got priced into the bond market over the last 30 days, but stocks seem to have ignored it. And so what we're left with is just stocks are more expensive. And there's really no justification for that, because the earnings picture really hasn't improved yet.

The S&P estimate that you are holding for this year for earnings is, you know, I just want to try and get an idea of what fair value is, because you obviously think that the market has disconnected, the equity market has disconnected from the backdrop, the Fed backdrop, the economic backdrop. What do you think, what is your estimate for the S&P for the year, Mike? Yeah, so our base case hasn't changed, Joe. It's $195, $195. And, you know, we have a bear case. If we have a recession, it's closer to $180, $185. We're still kind of holding out that a recession is avoidable. But the margin degradation is not.

And that's really, I think, where we're differentiated. Now, what we have heard from clients more recently is that not just because the economic day has been better, but there's a better tone out there that perhaps the earnings degradation doesn't have to be as bad as people were thinking, you know, two or three months ago. And we just disagree with that. That's what our work suggests. I think some of those retailer results this morning kind of prove our thesis again, which is that profitability is the question, right? This is, you know, inflation increases your operating leverage and that cycle has turned down. We'll get through it. This is not the end of the world.

This is not 2008. There's not going to be a financial crisis. This is just a good old fashioned earnings recession because of the over earning that we enjoy during COVID. Does the multiple need to contract too? So if we do what you want to get down to 180 times what 15, what's that come out to? Well, that would be our trough number. So you don't usually put a trough multiple on trough. Yeah, but it could it could overshoot, right? So look, we think the range is somewhere between 3000 and 3300. We've been very consistent about that for the last six or nine months.

We kind of went down to 3500 in October. We thought that was close enough. You know, we traded that. But now we're back at 41, 4200, you know, over the last month or so on really air because the earnings pictures we mentioned hasn't changed. So I think that low 3000s, you know, at least the retest of the October lows, which is now, I think, very out of consensus, you know, most clients, I would say back in October, thought we would take out 3500. But now I think the majority of folks think we don't need to go anywhere near there because of this potential soft landing and the Fed, you know, the Fed will pivot eventually. And so there's this willingness to kind of look through the valley.

And we think that's a bit dangerous as well.

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