Morgan Stanley’s Michael Wilson — among the most bearish voices on Wall Street — expects the debate around raising the US government’s $31.4 trillion borrowing limit to trigger some sharp swings in equity markets.

Most clients “believe it will ultimately get resolved, but not without some near-term volatility,” Wilson wrote in a note, adding that many have framed the event as “a lose-lose for markets.”

The strategist, who correctly called the slump in US stocks in 2022, said even if the debt ceiling was lifted by the so-called X-date — the day when the Treasury’s cash runs out — it could potentially squeeze liquidity and lead the S&P 500 lower, “given the index’s sensitivity to changes in liquidity in recent history.”

President Joe Biden and House Speaker Kevin McCarthy have been locked in a standoff for months over the budget negotiations and plan to meet Tuesday to discuss the matter. A US default risks triggering a market selloff, a spike in borrowing costs and a blow to the global economy that could rival the 2008 crash.

A historical analysis by Morgan Stanley strategists showed energy and utilities stocks to have been the top relative performers during previous debt ceiling debates, with technology, health care, consumer staples and dividend growth performing well following a resolution.

The impact of the impasse on US stocks has been minimal so far as investors also monitor the outlook for economic growth and corporate earnings. Although the first-quarter reporting season has been largely better than feared, Wilson said he remains bearish in his forecast for full-year profits amid slowing economic growth.

“The market is speaking loudly under the surface — it is bracing for further macro and earnings disappointments,” the strategist said. That has made investors reluctant to pile into sectors such as regional banks and lower-quality cyclicals despite their recent underperformance, he said.

--With assistance from Farah Elbahrawy.

This article was provided by Bloomberg News.