Top Wall Street analyst issues stark warning for stocks

Speaking late Monday on Bloomberg Television, Wilson noted the concentration of gains in tech, and he effectively stuck to his spring target call for the S&P 500, suggesting the “likelihood of upside from now until year end is very low, much lower than normal.”

Morgan Stanley’s Wilson: Correction coming

“I think the chance of a 10% correction is highly likely sometime between now and the election,” Wilson said, adding that investors are likely to endure a “choppy” third quarter heading into the November presidential decision.

Second-quarter earnings are likely to prove crucial for the market’s near-term performance, with JP Morgan (JPM) , Wells Fargo (WFC) and Citigroup (C) kicking things off on July 12 with the first set of blue-chip updates.

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Financial-sector profits, however, likely to contribute only around 18% of the S&P 500’s expected earnings tally of $495.2 billion, according to LSEG data. The bulk of the gains are forecast to come from information technology and communications services.

That level of concentration, which has defined the S&P 500’s year-to-date gain of around 17%, was also cited by Wilson as a factor in his still-bearish outlook.

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“The average company has not had good earnings results,” Wilson said, adding that “valuations to me look very unexciting.”

FactSet data, in fact, suggest that stocks are trading at historically rich valuations, with the forward price-to-earnings multiple of the S&P 500 pegged at 21.2, compared with the five-year average of around 17.2.

The bullish bear: A 10% drop = opportunity

In the first-quarter earnings results, stocks from IT and communications services contributed around 32.8% of the S&P 500’s $472.1 billion in profits, up from around 27% over the three months ended in December.

Wilson’s S&P 500 price target of 5,400 points still puts him on the bullish side of Wall Street, where the median year-end forecast for the benchmark sits at around 5,250 points.

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In fact, the strategist sees value in high-quality growth stocks. He suggests investors focus on individual names with strong balance sheets and a track record of earnings growth rather than a passive index strategy, as he waits for the impending correction.

“If they were to come in 10%, then we would probably get interested again,” Wilson said.

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