Morgan Stanley's Michael Wilson says hawkish fed could damp stock rally

Stock market investors holding on to hopes that the Federal Reserve will cut rates in the second half could be disappointed later this week, according to Morgan Stanley's Michael Wilson a staunch Wall Street bear.

The US central bank is expected to hike interest rates on Wednesday, marking the 10th consecutive increase going back to March of last year. "If the message delivered at this meeting is more hawkish, it could provide a near-term negative surprise for equities," Wilson wrote in a note.

Bond market expectations for rate cuts could be re-priced to a path that's more in line with Morgan Stanley economists' view for a pause later this year if Fed Chair Jerome Powell's remarks warrant it, according to Wilson.


"That could ultimately be a negative surprise for equities, particularly given the upside in index price we've seen into the FOMC and the fact that this meeting is one of the least talked about in recent memory," said Wilson, who was ranked No. 1 in last year's Institutional Investor survey after correctly predicting the selloff in stocks in 2022.

The benchmark S&P 500 has climbed over the past two months even amid banking sector turmoil and recession concerns, as investors take comfort in better-than-feared earnings and expect any slowdown to be mild. Still, Wilson said hopes of a profit recovery in the second half of this year and throughout 2024 are overdone.