“Wiiiiiilssoooon!!!”
I can’t do it. Not anymore. I can’t start a Mike Wilson article without a Cast Away reference. That, despite the fact that I’ve never actually watched Cast Away, or not all the way through.
Wilson, the man formerly known (perhaps unfairly) as Wall Street’s perennial bear, isn’t worried about stocks. In his latest, out Monday as usual, Mike pointed to the de-rating discussed here and here as evidence that equities aren’t as “complacent” as bears might be inclined to suggest.
“The S&P 500 forward P/E ratio is now just 19x, the March low reached during the height of the Iran conflict,” he wrote, noting that “strong nominal GDP and earnings growth as the Fed tightens are the primary ingredients of a classic mid-cycle investment regime.”
The figure on the left, below, is useful: It makes clear the extent to which the march higher in profit expectations has served to cheapen equities in a sideways-ish tape. Since June 1, the S&P’s up all of 1.5%.
The figure on the right conjures one of Wilson’s favorite rules of thumb: 4.5% on 10s is an important level for stocks, in Mike’s view.
“While the Semis selloff played a role in the [index] de-rating, so did higher rates,” Wilson wrote. “Specifically, the peak in valuation for the S&P coincided with the 10-year yield’s breach of 4.50%, the threshold we have long pointed to as the level at which rate sensitivity increases meaningfully for stocks.”
Again (or, more aptly to account for how many times I’ve said this, again, again), what counts for stocks when it comes to 10-year yields isn’t necessarily any magic level, but rather the rapidity of the increase. I don’t think Wilson would argue that point. But it’s worth making all the same.
This week, Wilson offered a more nuanced take on the Fed, where that means he added a few caveats to his contention that Kevin Warsh is someone the market will view as a credible inflation fighter.
The August CPI report was “firm enough to justify following through on the reaction function [Warsh] spent several months trying to establish without suggesting the Fed had fallen dramatically behind the curve as it had in 2021,” Wilson said, adding that Warsh’s “willingness to enforce” the framework he defined in June and July, then refined in Jackson Hole, made the September hike “credibility-enhancing.”
But in the next breath, Wilson alluded, however obliquely, to the possibility that Warsh’s monetarist leanings could make it difficult for him to follow through on any designs he might have regarding SOMA shrinkage without running afoul of The White House in earnest (i.e., in a way that chances more forceful pushback beyond an irritable TruthSocial post).
“[W]e think the bigger risk to financial markets from the Warsh-led Fed stems from its eventual decisions on the Fed’s balance sheet and how it reacts to money supply/credit growth in the private economy,” Wilson said.
While a series of small rate hikes over the next 12 months isn’t likely to end the bull market, “a more hawkish approach to money supply/credit growth [could] be a greater risk,” Mike went on. “On this score, Warsh’s resolve is less certain, and his ability to influence the rest of the Committee in this regard even less so given the institution’s history.”
If you’re wondering whether Wilson’s still confident in his year-end SPX target of 8000, the answer’s “yes.” The biggest risk to that forecast, he said, “is rising crude and refined product prices.”
4.5-5% yields are just too attractive to more conservative investors, especially with the future of oil and diesel prices to be determined. Also, most midterm election years witness a September-October decline followed by a year-end rally.