• Even the cyclical names that have gone too far’ could tumble
  • Lack of cash coming in the door is an earnings vulnerability

Morgan Stanley’s Michael Wilson says he still sees some 20% downside on some of the big technology and meme stocks, without specifying which ones. 

The long-time equities bear said on Bloomberg Surveillance that valuations are out of bounds even without an earnings recession. 

“Overall, the growth of your stock, even the cyclical names that have gone too far now, could have as much as 20% downside, no problem,” Wilson said. He said that he could see some firms going bankrupt. 

While he said in a note Monday that he’s expecting stocks to rally in the short term, he still warns that the S&P could test the October low as fundamentals deteriorate. The S&P 500 has risen 5.4% this year, while the technology laden Nasdaq 100 has surged more than 12%.

Wilson was ranked No. 1 in last year’s Institutional Investor survey after correctly predicting the selloff in stocks in 2022. In October, he correctly forecast a rally in US equities. 

The strategist said that markets have forgotten about “the whole idea of accruals” — earnings without cash coming through the door. The spread between companies’ cash flow and income reported during this period of hot inflation will hurt margins, Wilson said. 

Read More: Worst Earnings Quality Since 1990 Erodes Bull Case for US Stocks

“The question is will the markets look through that and suggest that ‘this is temporary and companies will get their head around it’ which we agree with,” Wilson said. “But our experience is that the market will not look through it if the earnings degradation is as severe as I think it’s going to be.”

The problem, he said, is that markets’ abilities to see through the difference between the real economy and what could happen with earnings “takes longer than it should.” 

“That is what is frustrating for some investors who are in the weeds on this,” he added. “It is obvious what is about to happen. Why is the market taking so long to price this? That is just the way it is.”

Written by:  and  — With assistance by Tom Keene and Lisa Abramowicz @Bloomberg.com