Morgan Stanley warns of slowing growth, shares plunge 10%

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Investors may be playing with fire.

Despite the buying frenzy late Monday, the S&P 500 was vulnerable to a 10% plunge, according to Morgan Stanley’s Mike Wilson. Investors are dangerously downplaying the conflict between Fed tightening and slowing growth, he warned.

The firm’s chief U.S. equity strategist and chief investment officer told CNBC’s “Fast Money.”

Not since the 2008 financial crisis has Wall Street seen such a big intraday reversal. In Monday’s session, the Nasdaq rebounded from a 4% loss, while the Dow fell at a low of 3.25%. The blue-chip index fell as much as 1,015 points. But by the close, the Nasdaq, Dow and S&P 500 were all in positive territory.

The market’s biggest bear, Wilson, expects the painful decline to happen over the next three to four weeks. He expects the challenging earnings report and guidance will be a wake-up call for investors to slow growth.

“I need a value below 4,000 to be really constructive,” Wilson said. “I do think it’s going to happen.”

His strategy: Double down on defensive trades ahead of expected setbacks. He warned that nearly every S&P 500 stock will face more trouble because of the bubble, and that decisions are being made on a stock-by-stock basis.

“We’re not making big bets on cyclical stocks like we were a year ago because growth is decelerating. People are getting too excited about these cyclical parts of the market, and we think that’s wrong,” he said. “Demand will pay off this year. We do see margins as a potential issue.”

Wilson doubts the Fed’s two-day policy meeting, which begins on Tuesday, will provide meaningful comfort to investors.

“They’re not going to back down because the market here is a bit of a sell-off,” Wilson said. “The data is really not soft enough that they can’t stop the tightening process.”

On Monday, the S&P 500 closed at 4,410.13, 8.5% below the index’s all-time high set on Jan. 4. Wilson’s year-end price target is 4,400.

NBC Finance Robert Ham contributed to this report.

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