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Morgan Stanley’s Mike Wilson says the Fed is likely to knock the economy and warns that stocks look overvalued

The Federal Reserve is likely to hurt the economy and US stocks currently look overvalued, Morgan Stanley’s chief US strategist Mike Wilson has warned.

In a note to clients on Monday, Wilson said the recent jump in bond yields shows investors think the Fed can hike interest rates sharply, to around 3%.

But the strategist questioned whether the central bank would be able to push rates that high without knocking growth and being forced to backtrack somewhat.

Wilson said he’s skeptical that the Fed can pull off a so-called “soft landing” for the economy.

“We do question the bond market’s apparent view that the Fed can do this much tightening without impacting the economy in such a way that this path for rate hikes will be challenging to complete,” he said.

Wilson said he thinks the SP 500 continues to trade at valuations we find hard to justify, despite the index being down around 6% this year.

However, he said the “internals” of the stock market were acting as more useful economic indicators than bonds.

The Morgan Stanley strategist said “defensive” stocks have rarely done so well as in the start of 2022, suggesting that investors are bracing for a slowdown in growth.

Analysts typically define defensive stocks as those that pay out good dividends and can maintain earnings even if the market or the economy slows.

Utilities companies are traditionally seen as defensive, and Wilson noted that they’ve had one of their best periods on record. He recommended investors stick with defensive companies “because growth is going to disappoint.”

Looking ahead to earnings season, Wilson said the market expects revenue growth to have slowed quite sharply in the first quarter.

The strongest growth is expected in the energy, industrials and materials sectors, while the weakest is expected in the financial, consumer discretionary and communications services sectors, he said.

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