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According to Morgan Stanley's Mike Wilson, one of Wall Street's biggest short sellers, the likelihood of a full-blown collapse is low despite the challenges facing U.S. stocks due to seasonal headwinds and an uncertain growth outlook. However, these factors may limit the upside for U.S. stocks for the rest of the quarter.

Zhitong Finance APP learned that Wilson accurately predicted the recent decline in the US stock market in July, and he believes that although last week's sell-off has kept traders nervous, the market will not experience a large-scale collapse. This view is in stark contrast to the bold bearish predictions that have made Wilson famous in recent years. However, he still believes that the S&P 500 index has little room to rise and expects the index to fluctuate between 5,000 and 5,400 points - about 7% lower than Tuesday's level at the lower limit, and basically flat at the upper limit.

“I have a hard time believing that we’re going to break out again to the highs, and I don’t think the stock market is going to completely collapse in a way that we enter a new bear market,” he said in an interview on Tuesday.

Wilson noted that with the S&P 500 already up more than 13% this year, slowing economic growth, overly optimistic earnings expectations and the Federal Reserve's "passive" stance on rate cuts have created a difficult environment for further gains. He sees more opportunities in individual stocks than in the overall index and reiterated his recommendation to buy so-called defensive stocks, a view that goes against the mainstream view that most investors continue to follow the tech rally.

He said: "It's hard for me to get excited about the index, which is why we are very focused on opportunities at the individual stock and industry level to find the possibility of profit." He also mentioned that current market valuations are high.

Over the past month, U.S. stocks have been rocked by concerns that the Federal Reserve is not cutting interest rates fast enough, which could lead to a sharp slowdown in the U.S. economy. Last week, the S&P 500 had its best and worst single-day performances since 2022, ultimately ending flat in five trading sessions.

On July 9, Wilson said a 10% correction was "very likely." A week later, on July 16, the S&P 500 hit a new high, but then fell 8.5% until it hit a short-term low on August 5. Since then, the index has recovered more than 4%.

U.S. stocks rose on Tuesday as data showed that the producer price index (PPI) rose less than expected. The next big challenge for traders is the release of the consumer price index (CPI) on Wednesday morning.

Wilson continued to advise investors to stay away from the Russell 2000 small-cap index, saying its rebound last month was driven by the so-called "deleveraging" process, which refers to investors pulling money out of large-cap technology winners and covering their short positions in small-cap stocks. He pointed out that the negative technical formations in small-cap stocks indicate that the group's July rally was just a "one-off" phenomenon.

That doesn't mean traders should avoid small- and mid-cap stocks entirely, though. Investors should stick with high-quality companies with strong fundamentals when looking for opportunities within these groups, he added.

Wilson reiterated his view that the market is still in the late stages of the cycle and the Federal Reserve is ready to ease policy in September. He said: "The current strategy is to stay in high-quality assets and favor defense over growth because rate cuts are most beneficial to this group of stocks."