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The S&P 500 price action doesn’t reflect worsening fundamentals, Morgan Stanley strategists told clients in his regular weekly note.
It doesn’t reflect the fact that the Federal Reserve is hiking rates during an earnings recession. Deteriorating fundamentals and earnings recession are likely to push U.S. equities towards “the lows for this bear market later this spring.”
“We think the risk-reward is as poor as it’s been at any time during this bear market,” the strategists wrote.
The Fed pause isn’t coming and the market is wrong in trying to price it in. This is the second time that the market has made such a mistake after a similar failed attempt last July, strategists added.
“Sector leadership YTD (driven by Tech and Growth) looks aligned with last summer’s bear market rally when premature hope for a Fed pivot was the underlying narrative. The key differences this time around are that the earnings picture is much worse with forward EPS now negative on a year-over-year basis and risk premiums are even richer.”
On what could start the next leg lower, strategists highlight a possible hotter-than-expected CPI release this week.
“We acknowledge the growing expectation for an above consensus result,” they warned.
