Why the Christmas rally won't happen (according to Morgan Stanley)

The awaited "Christmas rally" will not take place this year.
According to Morgan Stanley, expectations for the traditional stock market sprint appear to have diminished significantly.
This perspective, supported by in-depth analysis and relevant data, opens a window onto a financial future that promises to be different than what one might expect.
In this article we analyze Morgan Stanley's forecasts, trying to understand the key factors that justify this scenario and the implications it could have for investors.
Why there won't be a Christmas rally Mike Wilson, senior senior strategist at Morgan Stanley, raised a warning sign about the traditional Christmas rally in financial markets this year.
Its analyzes point to a potentially bleaker landscape than one might expect this holiday season.
Wilson, known for his sagacity in reading market dynamics, predicts that the S&P 500 index, often considered a sort of thermometer of Wall Street, will close the year at 3,900 points.
This places Wilson among the strategists who take a more cautious view, as suggested by the recent Market Strategist Survey conducted by CNBC.
His judgment reflects a careful reading of several factors currently influencing the performance of financial markets, suggesting that the classic Christmas euphoria could be tempered by a series of economic and geopolitical variables.
A detailed analysis of its outlook offers a deeper look into its view of the market.
Here are the three factors to consider according to the analyst.
1) Price Volatility One of the main reasons behind Wilson's pessimistic outlook is price volatility.
Wilson argues that, towards the end of the year, there is a greater probability of a decline in prices than a rise.
This judgment is based on the principle that the size of a market tends to determine its price.
In other words, if the market is characterized by greater volatility and uncertainty, it may become difficult for stocks to experience a significant increase.
2) Economic Instability This year's economic and political picture has deviated from the norm, according to Wilson's analysis.
A picture of “cautious factor leadership, declining earnings revisions and weakening consumer and business confidence” have created an unusual and uncertain landscape.
Although the economy has been stronger than expected, Wilson believes earnings expectations are too optimistic for the fourth quarter and 2024.
3) Interest Rates and Monetary Policy Although the Federal Reserve has temporarily halted interest rate increases , Mike Wilson highlights that the current level of federal rates could remain high for an extended period.
Furthermore, the delayed effects of these increases are still influencing the performance of the economy.
This situation can pose a challenge for families and businesses, despite headline employment data showing robust performance.
The combined effect of these factors contributes to significant fragility in market breadth.
In other words, the current economic context could lead to some uncertainty and instability for those involved in the financial market.
Downward Earnings Revision Wilson highlights one key element to support his view: the earnings revision shows a limited downward correction.
This indicator measures how much analysts lower company earnings forecasts and recently marked a significant decrease, entering negative territory.
While some might interpret this as an oversold signal, Wilson interprets it as a reflection of his view of a late economic cycle in which companies' profit margins are at risk.
In other words, the earnings revision suggests that many companies may be in a difficult place in terms of profitability.
Economic sectors under pressure Economic sectors sensitive to interest rates, such as banks, real estate, semiconductors and consumer durables, have shown marked underperformance over the past three months.
On the other hand, defensive sectors and the energy sector have started to outperform.
This supports Wilson's view of a market late in the economic cycle and justifies his defensive strategy.