Here’s Mike Wilson’s stock-market playbook for three economic scenarios.

“Despite the significant rally into year end, recent macro data still suggests a muted growth environment, which epitomizes a ‘soft landing’ outcome. The market understands this dynamic. Interest rates and financial conditions explain almost all of the increase in stock prices with equity valuations expanding by almost 15% over the past 2 months,” he says.

Wilson has been pessimistic for some time, though he recently started turning at least more positive toward small caps. Wall Street’s most celebrated bear is certainly not a bull just yet: “growth will likely need to reaccelerate (while rates remain relatively tame) for equity prices to move materially higher from here.”

In a soft-landing environment, the onus will be on accommodative policy, ample liquidity and interest rates to keep price-to-earnings multiples supported, he said. And stock picking will be key as it typically is in a late-cycle market environment where outperformance is likely from defensive growth companies such as healthcare and late-cycle cyclicals such as industrials, as well as lower-volatility large-cap growth stocks. 

But Wilson also gave playbooks for two different scenarios. One is a reacceleration in nominal growth (that is, GDP plus inflation). The recent loosening in financial conditions “could stir animal spirits for individuals and companies, driving more spending/capex, hiring and M&A. The recent fall in interest rates may also spur pent up demand for housing, autos and other durable goods which have been under pressure from higher rates over the past year.” He said he’ll be paying close attention to fourth-quarter earnings for how companies are thinking about the Fed’s dovish shift. 

In that scenario, the equal-weighted S&P would outperform, and small caps, cyclicals and economically-sensitive industries would lead, while there would be less support for long-duration stocks.

And a third scenario would be the hard landing that many had predicted for 2023. In that scenario, healthcare, utilities and consumer staples would outperform, and higher-quality companies would outperform lower quality from an earnings and balance sheet perspective. Large caps would outperform small caps, and growth would outperform value, he added.

The market

U.S. stock futures
ES00,
-0.07%

NQ00,
+0.01%
were lower across the board, but particularly Dow futures
YM00,
-0.41%
owing to Boeing’s misfortune. Oil futures
CL00,
-2.89%
skidded, and gold
GC00,
-1.15%
fell by about $16 an ounce. The yield on the 10-year Treasury
BX:TMUBMUSD10Y
was holding above 4%.

The buzz

The big story over the weekend was the window panel that blew out of an Alaska Airlines Boeing 737-9 Max, somehow not injuring any of the 174 passengers and six crew on board.

As a result:

• The Federal Aviation Administration grounded 171 of those planes, which mostly impacts Alaska Air Group
  ALK,
  +3.10%,
  which operates 65 of the jets, and United Airlines
  UAL,
  +3.19%,
  which operates 79. Shares in both airlines fell.

• Boeing
  BA,
  +1.66%,
  which said it supported the FAA move, saw its shares skid 8% in premarket trade. Fuselage maker Spirit AeroSystems
  SPR,
  +0.73%
  tumbled 15%. Boeing rival Airbus
  AIR,
  +2.45%
  rose 2% in Paris trade. 

Merck
MRK,
+0.18%
is in talks to buy cancer drugmaker Harpoon Therapeutics
HARP,
-1.49%
for about $700 million, or $23 per share, Bloomberg News reported, citing people familiar with the matter. 

Tesla
TSLA,
-0.18%
CEO Elon Musk criticized the Wall Street Journal after the news outlet reported, citing witnesses, illegal drug use, but stopped short of an outright denial.

The New York Fed releases its survey on inflation expectations, as Atlanta Fed President Raphael Bostic delivers a speech on the economy at noon, kicking off a week of economic news that will be highlighted by Thursday’s CPI release. Dallas Fed Lorie Logan over the weekend said it was too early to take a rate increase off the table, as she called for a slowdown in the pace of runoff of its balance sheet.

Lawmakers agreed to spend $1.59 trillion, two weeks ahead of a possible shutdown, though they now have to produce a final agreement. 

Fourth-quarter earnings season starts on Friday, with results from money-center banks including JPMorgan Chase
JPM,
+0.50%,
Bank of America
BAC,
+1.86%
and Citigroup
C,
+1.04%.
The most fearful bankers, one poll found, are at Citi, which is restructuring, and UBS, which is absorbing Credit Suisse.

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The tweet

Dan Loeb, the chief executive of hedge-fund Third Point, says former Treasury Secretary Larry Summers is try to take both sides of the economic argument.

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