According to Morgan Stanley's chief stock strategist, Mike Wilson, the likelihood of a recession is increasing. The bank is cautious, indicating that the S&P 500 could dip below 5,500 in the case of a severe economic downturn. Wilson identified four key investment themes to consider amidst heightened recession concerns.

Wilson expressed that the risk of a recession has risen to about 30%-35%, up from 10%-20% earlier in the year, impacting stock market expectations. He warned that the S&P 500 might fall below 5,500 in a worst-case scenario. Despite this, Morgan Stanley's base scenario anticipates the S&P 500 climbing to 6,500 within a year, projecting a 14% increase from current levels.

There is increasing speculation on Wall Street about a potential recession. Goldman Sachs raised its forecast for a recession in the next 12 months from 15% to 20%. Additionally, a recent Bank of America survey indicated that 55% of fund managers see a global recession instigated by trade tensions as the primary risk to the market.

Wilson noted that Morgan Stanley has been preparing for economic slowdown over the past year, which has led to the outperformance of its Focus List compared to the S&P 500. This list has yielded a 7% return year-to-date, contrasting with the benchmark index's 3% loss.

He discussed strategic shifts the bank is implementing in response to the current economic conditions:

1. Reduced focus on consumer goods Morgan Stanley is reducing exposure to consumer goods stocks due to the economy's underlying weaknesses. Wilson believes most of the "private economy" has been experiencing a recession for at least two years, supported by declining home sales and manufacturing activity observed several years ago. The bank's long-standing underweight position in consumer goods has delivered consistent returns over the past three years.