No need to panic over stocks ‘death zone’ warning

Investors might have been alarmed by dire headlines last week, after Morgan Stanley’s Mike Wilson warned stocks were in the “death zone”. Wilson’s language was certainly dramatic. Like Himalayan climbers, investors “have followed stock prices to dizzying heights ... as liquidity (bottled oxygen) allows them to climb into a region where they know they shouldn’t go and cannot live very long”.

Steep stock valuations coupled with rising bond yields mean the equity risk premium is the lowest since 2007. Given further rate hikes and excessive earnings expectations, current risks look “extreme”, with stocks potentially falling 25 per cent.

However, while it sounds alarming, Wilson is not as bearish as it might seem. Less media attention was made to his CNBC interview, where he said this is “not the end of the world. This is not 2008. There’s not going to be a financial crisis”.

Rather, he envisages a cyclical bear market, a “good old-fashioned earnings recession because of the over-earning that we enjoyed during Covid”, a “valley” investors will have to get through. Indices should subsequently rebound, with all-time highs likely within the next 18 months.

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If Wilson is right, stocks will suffer in 2023 but will be about 20 per cent higher in 18 months’ time than they are today – an outlook not nearly as dire as the “death zone” that headlines might suggest.