- The S&P 500 could tumble 10% to below 4,000 in the next month, according to Morgan Stanley's Mike Wilson.
- The strategist's outlook is based on the tough operating environment that companies will have to deal with.
- In a challenging market, Wilson highlighted opportunities for investors in defensive and healthcare stocks.
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Morgan Stanley's Mike Wilson is predicting the benchmark S&P 500 stock index could tumble even further, as companies grapple with a tougher economic environment.
The equity strategist, who correctly called some big market sell-offs in the last two years, said a 10% pullback to below 4,000 is in the cards for the S&P 500 in the next three-to-four weeks. He has a year-end target of 4,400 for the index.
The S&P 500, which dropped briefly into a correction as stocks plunged on Monday, recovered to close the session at 4,410.13. It is down 7.4% for January so far.
US equities have whipsawed wildly in the run-up to the Federal Reserve's policy decision Wednesday, at the end of its two-day meeting.
Markets expect the central bank to hike interest rates four times in 2022, beginning in March. But investors are anxious that it could be faster and more aggressive on policy as it attempts to tame the strongest inflation in nearly 40 years
But Wilson, who is Morgan Stanley's CIO and chief US equity strategist, doesn't believe the sell-off in stocks on Monday will prompt any change in tone from Fed policymakers.
"I think it's a combination of the Fed continuing on this course, they're doing their job, they're not going to back off because the market sold off a bit here," Wilson said in a CNBC interview on Monday.
"And the data really hasn't been soft enough for them to stop the tightening process that's going to go forward."
Wilson called on investors to stop focusing on the Fed's hawkish policy shift, and instead prepare for a slowing economy, in a note published Monday.
He told CNBC his 10% drawdown is based on the difficult business conditions faced by companies listed on the S&P 500. The weeks ahead will be the first time companies come out with their earnings and guidance for the year ahead, he noted.
"Some of them will take this as an opportunity to maybe lower the bar a bit because, look, it's a tough operating environment," he said.
Wilson noted that economic indicators such as retail sales data and monthly surveys of private sector companies have weakened, compared with readings a year previous. He suggested it could take some time for the market to fully price in the recent performance.
The equities strategist highlighted opportunities in defensive stocks, including some quality plays in tech that "deserve to be expensive."
"Healthcare is the other one. I would say that has kind of that barbell of growth and defensive qualities."
"And then if you go pure defense, I mean it's utilities and staples and REITs of that group," he added. "I'd say we prefer REITs and staples more than utilities."