Morgan Stanley: Current rebound could see another 10% upside from here

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Morgan Stanley analyst Michael Wilson said Monday that the current upswing in the stock market could take the S&P 500 (SP500) (SPY) back to levels between 4,000 and 4,150 -- on the upside, almost 10% above the current mark of around 3,783.

In a note to clients, the equity strategist and his team argued that rates in the bond market (US10Y) (TBT) (TLT) "are poised to come in" as the market continues to react to expectations for Federal Reserve policy. He contended that recent action in fixed income has created a situation where "the back end of the bond market" is now offering "real value for the first time since early 2021."

"Such a move [in the bond market] could provide the necessary fuel for the next leg of the tactical rally in stocks until we get full capitulation on 2023 earnings estimates, something we think may take a few more months," the note stated.

Wilson, who had previously predicted the stock bounce that has occurred over the past week or so, noted that "last week's price action delivered what we wanted to see in the context of our tactical bullish call."

The analyst added that recent trading has underlined the fact that the equity markets are poised for an upswing when the Fed eventually pivots from its ultra-hawkish stance, as evidenced by Friday's rally on the faint suggestion that policymakers were looking to slow rate increases.

"Stocks rallied in the face of higher rates until Friday when just the slightest whisper of a potential Fed pivot revealed how offsides both bond and stock markets may be," he wrote.

Wilson didn't discount the possibility that stocks could see a near-term swoon as well, although he thinks the 200-week moving average, which currently sits around 3,605, would provide "a stop loss for a potential move towards 4,000-4,150."

Elsewhere in the Wall Street community, Goldman has taken a defensive strategy, pulling back from tech in the face of ongoing rate increases.