The stock market could rally for another few months as upbeat earnings mask the pain to come in 2023, Morgan Stanley's Mike Wilson says

• Earnings may not fall fast enough to give investors a preview of pain to come, according to Mike Wilson.
• That means stocks could rally for another few months before hitting a bottom.

Better-than-expected earnings this quarter are masking the pain to come for the stock market, according to Morgan Stanley's top stock picker.

The bank's chief equity strategist Mike Wilson said Thursday that surprisingly upbeat earnings are failing to show investors that earnings are set to fall and the stock market has yet to bottom out.

"We're not sure that earnings are going to come down fast enough to convince the market how bad 2023 is going to be on the earnings front," he told Bloomberg TV.

Stocks including AT&T, Bank of America and Netflix all posted third-quarter earnings beats this week, helping the benchmark S&P 500 index to rally 2.3%.

But Wilson believes investors have stopped buying into bear market rallies and are now fatigued to the point where they're waiting for an obvious stock market bottom.

"People are tired, they want to get it over with," he said. "Let's just get it done and move on to next year."

"The risk for the equity market is on the growth side," Wilson added. "However, markets don't trade in a straight line and so we're getting a bit of a rally here and we think that could last for a month or two."

Wilson said that the release of fourth-quarter earnings reports in February 2023 will likely puncture any rally as companies finally accept there will be a recession and start revising their targets lower.

"We're on path now to have the finishing move which is going to be all about the earnings disappointment," he told Bloomberg.

"Every investor knows the earnings are too high for next year but yet the earnings remain very sticky on the upside because companies haven't thrown in the towel," Wilson added. "It's a process, it always takes longer than it should, and we think it should definitely be done by the end of the fourth quarter earnings season in February."

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