Morgan Stanley’s top strategist Micheal Wilson has once again urged investors to stay defensively positioned as the Q1 earnings season will show the growth deceleration.

Wilson believes the stock market sends a strong message to traders that growth won’t be coming. The strategist added that we are facing “a pivotal earnings season.”

“The internal message from stocks is diverging again from bonds and the . We believe it is worth following stocks when this happens. We recommend staying defensive, and being cautious about what bonds actually say about growth. This move appears more technical, which can exhaust quickly and reverse rapidly. Cyclicals look most vulnerable to such a reversal if it happens,” Wilson said in a client note.

On why the S&P 500 is trading less than 10% off the all-time high despite an extremely challenging macro environment, Wilson says that mis-priced yields helped the index to “remain resilient” after ignoring “the growing risk of a more hawkish Fed in the fourth quarter of 2021.”

Wilson argues that the stock market is “the best strategist in the world.”

“On that score, the internals of the stock market are once again diverging from the message from the bond market. In particular, the back end rates saw one of their largest monthly moves ever as Fed funds futures caught up to reality. We don’t feel the need to criticize the Fed for raising rates due to the current state of inflation, and their persistent attempts to persuade the rest of the world that they will do everything to stop it. However, 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,” the strategist added.

By Senad Karaahmetovic