Morgan Stanley’s Mike Wilson is telling investors to avoid a popular trade tied to the economy. “Cyclicals probably are more risky now than the growth stocks,” the firm’s chief U.S. equity strategist and CIO recently told CNBC’s ” Fast Money .” “The growth stocks — a lot of them had their comeuppance last year with the financial conditions tightening.” Cyclical stocks include shares that benefit when the economy is strengthening like retail. Now he’s looking ahead to a rapid fading of the January rally. He maintains positive market developments have already been priced in. The market’s current resilience, according to Wilson, is just another “bear market trap” with investors chasing price over fundamentals out of a fear of falling behind or missing out. “There’s this sort of narrative that China is reopening, inflation has peaked, [and] we can look through the valley here and start buying early cyclical stocks,” he said. “That’s a real mistake given the degradation in earnings that we think is coming.” He believes corporate America is going into the worst earnings recession since the 2008 financial crisis. “The reality is that earnings are proving to be even worse than feared based on the data, especially as it relates to margins,” Wilson told clients in his Monday note. “Secondly, investors seem to have forgotten the cardinal rule of ‘Don’t Fight the Fed’.” His call comes in the heart of earnings season, with big-name consumer cyclical companies such as Chipotle Mexican Grill and Walt Disney set to report quarterly results next week. Chipotle is expected to report an earnings per share of $8.91, with a year-on-year growth of 59.7%, according to analyst estimates tabulated by Refinitiv. Disney will earn $0.79 per share, with a 25.6% year-on-year decline, according to Refinitive estimates. Wilson is underweight consumer discretionary stocks, noting consumer sentiment is at recessionary levels due to inflation pressure. XLY 1Y mountain Consumer Discretionary Select SPDR On “Fast Money” in January, Wilson said earnings is ” another area investors are being a little bit complacent, ” so full-year estimates had to fall. Wilson has an S & P 500 year-end price target of 3,900, which is tied for second most bearish on Wall Street . It’s 6% below Friday’s close . Disclaimer
