Michael Wilson said that a soft job market could trigger a 10% stock market downturn; He pointed out that if non-farm employment fell below 100,000 people or the unemployment rate exceeded 4.3%, the economic slowdown would be obvious.
As the saying goes, 'water can carry a boat, but can also capsize it.' Michael Wilson, the chief investment officer of Morgan Stanley and a famous bear on Wall Street, said on Tuesday that the success or failure of the US stock market depends on the employment market.
He warned that any sudden weakness in the US employment market could trigger a substantial pullback in US stocks. This is the first warning he has issued since he went 'short-to-long' last month.
Wilson raised his 12-month target level for the S&P 500 index, expecting the index to rise 2% by June 2025, up from his previous forecast of a 15% decline.
According to Wilson, if the data on new labor force additions begins to decline, it will eliminate the possibility of a soft landing for the US economy and may lead to a Fed rate cut. However, given that the current rise in the stock market is being driven by hopes for the 'blond girl' economy, this could be enough to cause a 10% decline in US stocks.
'What is the key factor that turns growth into panic or potential recession fears?' he added. 'It's the labor market.'
He further pointed out that if non-farm employment falls below 100,000 or the unemployment rate rises above 4.3%, the slowdown in the economy will be apparent. It is certain that at least one of these two figures is far from Wilson's threshold: in May, the number of new jobs surged to 272,000, surpassing expectations.
Strong signals of weakness behind the scenes
But cracks have begun to appear. The unemployment rate unexpectedly rose to 4% in May, and the recruitment trends under the surface are showing complex signals.
Wilson said in a recent report that this is important for US stock investors because the market is now paying more attention to the trajectory of economic growth than to inflation and interest rate trends. In a recent interview, he said that this is why the current market is rational at a high level, as investors are buying high-quality growth stocks.
'The question is, whether the P/E ratio of these specific stocks is too high. I think if you can achieve a perfect soft landing, and it's very smooth, then that's okay. But if there's any deviation, that will be a problem,' he added.
In a previous report, he identified three major risks that could trigger a pullback in US stocks, saying the probability of a growth slowdown was the highest. He believes that in this scenario, the performance of high-quality large-cap stocks and defensive stocks may be better. Inflation rebound and deterioration of liquidity are the other two threats.
Finally, Wilson emphasized that the employment market risk will not occur today, but may become a risk in the third or fourth quarter. He said that once it happens, it will not only affect tech stocks, which are currently leading the trend.