The post-Fed stock market rally is a “trap,” Morgan Stanley’s Mike Wilson warns

“‘It’s going to be a trap in the end.'”

— Mike Wilson, Chief US Equity Strategist and CIO, Morgan Stanley

Morgan Stanley’s Mike Wilson, who has rightly proclaimed stock markets swooning in 2022, is unconvinced the bottoms are in after major US indices fell after Wednesday’s Federal Reserve decision to hike rates by another 75% Basis points or three-quarters of a percentage point increase, a large gain to 2.25% to 2.5%.

The Nasdaq Composite COMP, +1.08%, rose more than 4% on Wednesday, while the Dow Jones Industrial Average DJIA, +1.03%, rose 436 points, or 1.4%, and the S&P 500 SPX, +1.21%, up 2.6%.

Investors found reason to cheer after Fed Chair Jerome Powell said that while another move of 75 basis points in September was possible, the decision would depend on upcoming economic data. While Powell maintained that the Fed would cut stubbornly high inflation and that the economy needed below-trend growth, traders saw prospects that the Fed would slow the pace of rate hikes and no reason to lower their expectations for the federal funds rate to change to ultimately be somewhere south of 3.5%.

Read: Was Powell dovish of the Fed or not? 4 key takeaways from Wednesday’s press conference

Shares faltered in early trade Thursday but ended with another round of strong gains as investors digested an estimate of second-quarter gross domestic product that showed the US economy shrank 0.9% annually. This follows a 1.6% decline in the first three months of the year and underscores fears of a sharp slowdown in economic growth and the potential for a recession, but has also helped reinforce market expectations that the Fed will soon slow the pace of tightening, said analysts.

See: The US economy shrinks in the second quarter, the GDP shows and invites talks of a recession

Stocks fell sharply in 2022 as the S&P 500 and Nasdaq entered bear markets as the Fed moved to aggressively raise interest rates to curb inflation. However, Wednesday’s surge matched the pattern of the three days prior when the Fed implemented rate hikes in 2022. Such jumps were often followed by pullbacks.

Wilson, in a CNBC interview late Wednesday, said expectations that the pace of rate hikes would slow are premature. Wilson reiterated a warning from a note published earlier this week, in which he argued that a previous pattern in which stocks have risen in the period between a final Fed rate hike and the onset of a recession may not be at play in the current cycle is. That’s because the Fed could keep raising rates into a recession while trying to get inflation under control.

Wilson has a year-end target of 3,900 for the S&P 500, which is about 3% below Wednesday’s close. He also warned that the S&P 500 could hit the mid-June 2022 low of 3,636 and fall as low as 3,000 if a recession hits.

The bear market may be nearing “the end,” but it needs “that last move, and I don’t think the June low is the last move,” he told CNBC.

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