The odds of a year-end rally in the stock market are dwindling, Morgan Stanley's top equity strategist says

• Chances of a year-end stock market rally are dwindling, according to Morgan Stanley's top equity chief Mike Wilson.
• Wilson reiterated his view that the S&P 500 will fall 11% from current levels to 3,900 by year-end.
• "Weakening breadth and cautious internals reduce the odds of a fourth-quarter rally," Wilson said.

One of Wall Street's biggest bears is sticking by his forecast that the S&P 500 will fall 11% from current levels to 3,900 by the end of the year.

Morgan Stanley's top equity strategist Mike Wilson said in a Monday note that the chances for a year-end stock market rally are dwindling by the day as investors confront weak market breadth, declining earnings revisions, and a consumer that is on the verge of being financially tapped out.

Market breadth refers to the underlying participation of securities in a stock market rally. In other words, is a stock market rally being driven by only a handful of the largest companies, or is the majority S&P 500 companies also moving higher amid a broader market rally?

According to Wilson, right now it's the former and not the latter, and that's a bearish setup for a year-end stock market rally.

"The average stock has already broken down technically... the signals are weaker and suggest key tactical support is vulnerable," Wilson said. 

And stocks that screen for defensive criteria like low leverage, high free cash flows, and low volatility are some of the best performers in the market right now, which suggests "a cautious tone under the surface of the market," Wilson highlighted.

Other bearish factors that could weigh down stocks into the end of the year include a decline in earnings revisions among Wall Street analysts.

"Earnings revisions breadth for the overall S&P 500 has fallen sharply over the last couple of weeks (the most significant 2-week decline since July 2022)," Wilson said, adding that rosy projections for 12% profit growth in 2024 could be revised lower as third-quarter earnings season gets underway. 

"If we see revisions underperform seasonality over the coming weeks and continue to decline, it would be a sign that other cyclical risks including macro headwinds are driving the earnings revisions backdrop," Wilson said.

Finally, consumer confidence is on the decline as both prices and interest rates remain elevated. According to the University of Michigan Consumer Sentiment Index, consumers' assessment of their own personal finances fell by a marked 15%.

Altogether, this gives Wilson confidence that his year-end S&P 500 price target of 3,900 is within reach.

"The bottom line, the breakdown in various breadth measures, cautious factor leadership, the recent decline in earnings revisions and fading consumer confidence reduce the odds of a fourth-quarter rally," Wilson said.