Morgan Stanley warns stock market rally may be short-lived

This stock market After a brief rebound last week from a broad sell-off that began earlier this month, stocks could fall further as persistently high inflation and an increasingly hawkish Federal Reserve continue to pose risks to the economic outlook.

A relief rally in equities limited room for further strength before risks began to fade, Morgan Stanley analysts said in a note.

Inflation surged 8.3% in April, hovering near 40-year high

“Last week’s strength will ultimately prove to be another bear market rally,” strategists led by Michael Wilson wrote in a note. “The key fundamental calls we’re focusing on now are slowing growth, and our belief that earnings estimates are too high. the opinion of.”

Wilson sees the S&P 500 climbing as high as 4,300 in the current rally — up 10% from a week ago, when the index closed just above the bear market threshold and up 3.4% from Friday’s close.

Wall Street Market

The Wall Street sign is inscribed on the side of a building in New York on Thursday, November 5, 2020.U.S. futures and world stocks surge as investors await U.S. presidential election result and embrace the benefits of more gridlock in Washington (AP Photo/Mark Lennihan/AP Newsroom)

But it will be short-lived: Wilson expects the S&P to trade near 3,400 by the end of the second-quarter earnings season in mid-August. That would be 18% lower than current levels and 29% lower than the beginning of the year.

“Aside from the oversold rally, the main rationale for this particular rally is that the Fed may be considering a September pause,” Wilson wrote. But he warned that “inflation is still too high for the Fed to like, so any pivot that investors may hope for is too inconsequential to change the downward trend in stock prices.”

Wall Street has grown increasingly concerned that the Federal Reserve could inadvertently trigger a recession, and its war on inflation climbed 8.3% in April to near a 40-year high. Other firms predicting a downturn over the next two years include Bank of America, Fannie Mae and Deutsche Bank. Subramanian puts the probability of a recession at about 40%.

U.S. economic growth has slowed. The U.S. Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, the worst performance since the spring of 2020, when the economy was still in the throes of a COVID-induced recession.

US Federal Reserve

A man wearing a face mask walks past the Federal Reserve Building in Washington, DC on April 29, 2020. ((Xinhua News Agency/Liu Jie via Getty Images)/Getty Images)

Federal Reserve policymakers already raised their benchmark interest rate by 50 basis points earlier this month for the first time in 20 years and signaled that more hikes of similar magnitude will be considered at the upcoming meeting as they rush to catch up with inflation . Chairman Jerome Powell Officials recently pledged to “keep pushing” until inflation approaches the Fed’s 2 percent target.

Still, he acknowledged there could be some “pain” from lower inflation and suppressed demand, but he rejected the notion of an impending recession, citing the labor market and strong consumer spending as bright spots in the economy. However, Powell warned that a soft landing was not guaranteed.

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“It’s going to be a challenging task, and it’s become even more challenging over the past few months because of global events,” Powell said at a Wall Street Journal live event last week, referring to the war in Ukraine and China’s COVID lockdown.

But he added, “There are many possible paths to a soft landing or soft landing. Our job is not to limit the possibilities, but to try to make it happen.”