Market Recovery Could Be A Long And Bumpy Ride, Says Strategist — But Retail Relishes Fed-Fueled Rally

The broader equity market has been sliding since hitting a peak on Feb. 19, and with volatility persisting, a market strategist shared insights into the near and mid-term outlook for the market.

Morgan Stanley CIO and Chief U.S. Equity Strategist Mike Wilson noted that the U.S. equity indices were as oversold as they have been since 2022 amid bearish investor sentiment. The strategist expects the seasonals to improve in the second half of March.

Wilson sees first-quarter corporate earnings and second-quarter guidance to benefit from the recent dollar weakness. He also expects the benefits of the anticipated rate cuts to prove healthy for the economy.

At the end of a two-day meeting, the Federal Reserve's rate-setting committee decided to leave rates unchanged, with the "dot plot" signaling two cuts for the year. The updated Summary of Economic Projections showed lower growth expectations and raised inflation forecasts. 

In his presser, Chair Jerome Powell later clarified that a good part of the central bank's higher inflation forecasts come from tariffs. He also said Fed officials do not expect a recession to materialize.

Wilson expects the S&P 500 Index's 5,500 level to support a tradable rally, with support from lower-quality, higher-beta stocks that have sold off the most. 

However, the strategist isn't confident about the rally's durability and sustainability as the major indices have seen significant technical damage. The S&P 500, Nasdaq 100, and Russell 2000 indices have broken below their 200-day simple moving averages (SMA).

He also noted that many stocks were closer to the 20% correction territory.

Citing institutional investors, Wilson said the current weakness stemmed from the tariff and other "rapid-fire" policy announcements from the new administration under Donald Trump. 

He also mentioned other headwinds, such as extended valuations, the Fed's decision to pause after cutting rates aggressively by 100 basis points over three months before last December, and the anticipated slowdown in artificial intelligence (AI) capital spending.

According to the strategist, earnings revisions could be the most important variable, and it will take a few quarters for the factor to resume a positive uptrend. He also expects growth-friendly policies such as tax cuts, deregulation, and lower yields to arrive in the second half of the year. 

Wilson sees a short-term rally from his year-end S&P 500 target of 5,500. Given expectations that lower-quality stocks will likely lead it, he does not see new highs until the growth headwinds are reversed and monetary policy is loosened yet again.

"The transition from a government-heavy economy to one that is more privately driven should ultimately be better for many stocks," the strategist said. 

"But the path is going to take time and it is unlikely to be smooth."

On Stocktwits, retail sentiment toward the SPDR S&P 500 ETF Trust (SPY), an exchange-traded fund tracking the S&P 500 Index, remained 'bullish' at the end of Wednesday's session. The message volume dipped to 'low.'

Following the Fed-led rebound, the SPY stock was the most active ticker on the platform. 

SPY sentiment and message volume March 19, as of 10:44 pm ET | Source: Stocktwits

A bullish watcher expressed relief at Powell's assurance of no recession.

Another user was looking for Thursday's S&P 500 to break above its 200-day SMA.

The SPY ETF settled Thursday's session up 1.09% at $567.13, although the fund is down 3.23% year-to-date.  

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