Analyst who called the 2018 rout says S&P 500 is overbought and risks a correction soon

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Prominent Morgan Stanley analyst Michael Wilson says that investors shouldn’t get too complacent after a strong week for stocks.

The Morgan Stanley’s chief U.S. equity strategist, along with strategists Adam Virgadamo, Andrew Pauker and Michelle Weaver, in a Monday research note, say that the S&P 500 SPX, -1.78% could face a near-term correction.

“With many risk assets now overbought, we would not be surprised if a correction in U.S. equities begins soon,” wrote Wilson & Co.

The analysts say that the S&P could find support at the 200-week moving average for the broad-market index at around 2,650, and could face resistance at around 2,995, if investors manage to brush past what is setting up to be the weakest year-over-year earnings season since late 2009.

So far, earnings are on track to decline 14.5% from a year ago, according to John Butters, senior earnings analyst at FactSet, which would be the biggest decline since the 15.7% plunge in the third quarter of 2009.

The Morgan Stanley team is projecting earnings will sink an uglier 20% this year. The analysts say that the guidance from corporate executives could prove a near-term headwind for markets, and said that companies with high expectations for performance, could be the most vulnerable to pull backs.

On Monday, the S&P 500, Dow Jones Industrial Average DJIA, -2.44%, and the Nasdaq Composite Index COMP, -1.03% were under pressure, though off their worst levels of the session, after a two-week stretch of gains, as investors weigh a further plunge in oil prices CL.1, +104.41% and a slow unwind of lockdown protocols that have been in place to tamp down the spread of COVID-19, the illness that has infected more 2.4 million people globally and claimed more than 166,000 lives, according to data compiled by Johns Hopkins University.

Originally Published on MarketWatch


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