Tough to see the S&P substantially above 6,000 this year, says Morgan Stanley's Andrew Slimmon

Key Concepts

• Pause Year: A year where market growth slows down after a period of strong performance.
• Earnings Surprise: When a company's reported earnings are significantly different from analysts' expectations.
• Drawdown: A decline in investment value from a peak.
• Analyst Sentiment: The overall attitude or outlook of financial analysts towards the market or specific stocks.
• Volatility: The degree of variation of a trading price series over time.
• S&P 500: A stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States.

Market Outlook: A Pause Year with Potential Drawdown

Andrew Usselman, Senior Portfolio Manager at Morgan Stanley Investment Management, presents a cautious outlook for the market, suggesting a "pause year" after two strong years. He believes it's difficult to see the S&P 500 substantially above 6000 by year-end, given its current level around 5935. He anticipates another drawdown, potentially later in the summer, due to the market's tendency to deviate around a central norm.

Divergence Between Data and Projections

Usselman highlights a significant divergence between actual data and expert projections. First-quarter earnings came in strong, beating consensus by $3.50, yet full-year earnings estimates have decreased by $10, implying anticipated future weakness. He draws a parallel to the COVID period, where analysts were overly negative on earnings for 2020 and 2021. He suspects a similar scenario may unfold, leading to a rally towards the end of the year as analysts are forced to revise their numbers upwards.

Bull Market Fatigue and Potential for Pessimism

Usselman suggests that the current bull market, now in its third year, may be losing steam. He anticipates that second-quarter earnings might not be as strong, potentially triggering a sell-off from current levels. While he doubts a return to the lows seen a couple of months ago due to stronger earnings, he believes the limited upside potential for the year will cause previously optimistic investors to become pessimistic again.

Volatility and Drawdown Potential

Usselman emphasizes that the market doesn't move in a straight line and expects increased volatility. While he would be surprised to see the market revisit previous lows, he acknowledges the possibility of a 10% drawdown, similar to what occurred last summer.

S&P 500 Target Range

Usselman suggests an upper end of 6000 for the S&P 500 for the rest of the year, with a worst-case scenario of 5200-5300. While he doesn't explicitly state a year-end target, his comments imply a target around 6000.

COVID Analogy and Market Disconnect

Usselman draws a parallel to the COVID period, noting that the market is currently "hated" and many have reasons why it won't go higher. However, he also points out a key difference: despite lowered earnings estimates for the year, the market is near an all-time high. This suggests that the market doesn't believe the negative projections from Wall Street.

Conclusion

Usselman's outlook is cautiously optimistic, anticipating a "pause year" with potential for volatility and a drawdown. He highlights the divergence between strong current earnings and negative future projections, suggesting a potential rally later in the year as analysts revise their estimates. He emphasizes the importance of recognizing market volatility and the potential for pessimism to return. The market's current high valuation despite lowered earnings estimates suggests a disconnect from traditional Wall Street projections.