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Analyst who nailed 2018 has same S&P 500 forecast for 2019

New York

MIKE Wilson, the biggest equity bear on Wall Street whose prediction has proved prescient this year, has a similar outlook for 2019.

The chief US equity strategist at Morgan Stanley forecast that the S&P 500 will end next year at 2,750, the same level he forecast for 2018. That's about 3 per cent above the index's current level. With five weeks to go for the year, Mr Wilson's is by far the closest of all estimates to coming true.

He has stood out this year in predicting a "rolling bear market", where financial assets suffer a series of blows amid rising interest rates and a less-synchronised global economic expansion. That's just how things have unfolded, with turmoil in emerging markets followed by a tech-led rout in US equities and then a sell-off in the credit market.

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Prospects for a "material" deceleration in corporate profits underpin his persistent caution. As the benefit from tax cuts wears off and global growth weakens, the rate of earnings expansions for S&P 500 companies will slow to 4.3 per cent in 2019 from 23 per cent this year. And the odds of two consecutive quarters of negative growth is higher than 50 per cent, he predicts.

The Federal Reserve, which he expects to pause its interest-rate hikes in June, will help offset the negative profit backdrop. The fastest valuation contraction since 2011, with the S&P 500's price-earnings ratio falling 18 per cent from last year's peak to a low of 15 in October, also helps, he said.

"In short, the Rolling Bear is tired from all the mauling he has done this year," Mr Wilson said in a note to clients. "However, he is likely just resting rather than hibernating."

His 2019 target is again the lowest so far among Wall Street strategists tracked by Bloomberg.

Savita Subramanian at Bank of America predicted 2,900, saying a peak may come around 3,000 for the S&P 500. David Kostin at Goldman Sachs called for 3,000 while Citigroup's Tobias Levkovich forecast 3,100.

The final leg of this rolling bear market won't come until analysts give up on their robust estimates, Mr Wilson said.

As expectations are reset and the market tries to come to terms to the growth trajectory, stocks will swing wildly, Mr Wilson said. He reiterated his view that the S&P 500 is likely to be trapped in a range of 2,400 to 3,000 next year.

"We see a material slowdown in earnings growth coming next year, but recognise that until evidence is in hand and earnings revisions begin falling, the market could temporarily overshoot our base case target," he said. "We think such overshoots are to be sold until earnings revisions to the downside are complete."

Investors should go defensive, favouring large-cap stocks over small-caps. He cut the rating for industrial shares to equal weight from overweight while upgrading consumer staples overweight from equal weight. Shares of real estate investment trusts were also raised to equal-weight from underweight. BLOOMBERG