Large parts of the stock market are suffering a breakdown, Morgan Stanley's equity chief said.
Even the "Magnificent Seven" stocks will feel some pain if a recession hits, Mike Wilson said.
Pandemic savings are running dry and student-loan payments resume in October, Wilson noted.
The outlook for stocks is darkening as consumers run short of cash, and even the best-performing names could tumble if a recession hits, Morgan Stanley's stock chief has warned.
"We are seeing a breakdown again in a lot of the stock market," Mike Wilson said on "Bloomberg Surveillance" this week.
"Some of these consumer stocks are really, really struggling," he continued, attributing their woes to many consumers exhausting their pandemic savings, and the prospect of student-loan payments resuming in October.
"That's the wild card, that is the risk for the fourth quarter — can the consumer continue to surprise on the upside?" the investment bank's chief US equity strategist and chief investment officer asked.
The S&P 500 has climbed 11% this year, largely thanks to big gains among the so-called Magnificent Seven stocks. For example, Nvidia, Meta, and Tesla shares are up 190%, 147%, and 95% respectively.
Investors are betting the Federal Reserve, which has hiked interest rates from nearly zero to north of 5% over the past 18 months to cool historic inflation, will crush the threat without tipping the economy into recession. They may be proven wrong, Wilson cautioned.
"If you have a hard landing then even the big winners will feel that," he said, underscoring the current uncertainty around whether a recession will set in or growth will rebound.
"This purgatory land is we're just gonna kind of slop back and forth and the market's going to continue to gravitate toward the lifeboats," he said.
Wilson pointed out the Fed is in the unusual position of not being able to cut rates ahead of the recession, as that could reignite inflation.
"We're just going to ride this until basically you run out of gas, and that could be another year, we don't know the answer to that yet," he said.
Regardless, the Wall Street veteran emphasized that investors should own stocks when inflation is high, as companies with pricing power can charge more to offset their higher costs and continue growing their profits.
"That is your protection against this new regime," he said.
Wilson struck a more pessimistic tone in another recent interview. He warned there was limited upside and material downside to buying the S&P 500 today, and cautioned that a shock to the system could send the index down 20% or more, from around 4,300 points today to the low 3,000s.
"The cracks are forming," Wilson said. "They're all over the place, which is why people are cramming into a handful of stocks."
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