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Morgan Stanley chief equity strategists have, once again, warned the firm’s clients that risk-reward for stocks is “extremely poor” at current levels.
The S&P 500 fell modestly last week but it still trades comfortably above the 4000 handle. The strategists believe earnings expectations remain 10-20% too high, hence investors are advised not to chase this rally.
“While recent data has left the door open for a potential soft landing in the economy, we think it has also taken a Fed pause/pivot completely off the table. As a result, rates are higher across the curve, leaving stocks more expensive than at any time since 2007,” they wrote in a client note.
The strategists seem particularly baffled by a rally in growth stocks, which comes “at a time when interest rates have been on the rise again as the Fed indicates it is not finished fighting inflation.”
“The inconsistency of the price action between stocks and bonds is a good example of false readings during a time when liquidity may be clouding the fundamental picture. Perhaps the strongest evidence that the current environment is one of the riskiest we have witnessed since this bear market began comes from the latest reading of our Equity Risk Premium [ERP],” they added.
In this contest, Wilson sees “extreme risks” with ERP reaching 155bps last week, a figure that is “nearly impossible to justify with any narrative one wants to conjure up,” they concluded.
