Beware the Stock Rally

Morgan Stanley Analyst Warns of US Stock Market Rally 

Bearish voices amid a bullish market are growing by the day on Wall Street. The latest to join the fray is Morgan Stanley’s Michael Wilson, who has warned investors of getting carried away by the recent rally in the U.S. market. According to the analyst, ranked number 1 last year for correctly predicting a slump in stocks last year, investors should be wary of potential pullbacks after recent rallies.

Deteriorating Fundamentals

Wilson maintains there are many reasons to be bearish about U.S. stock’s long-term outlook. For starters, fundamentals and technicals already point to market problems. Moreover, the sentiment does not come as a surprise going by the high-interest rate environment. The U.S. Federal Reserve pushing the benchmark rate above the 5% level has triggered a significant increase in borrowing costs. Consequently, most businesses and companies are unable to access the cheap capital needed to finance expansion operations.

Similarly, the high-interest rate environment amid high inflation poses the risk of affecting consumer’s purchasing power. The result could be a significant decline in the goods and services that customers can buy. Most immortally, the prospect of the U.S. economy plunging into recession amid the high-interest rate environment is higher than ever.

Technicals are also pointing to an overstretched market after recent rallies.  The S&P 500 is already up by more than 9% amid deteriorating economic conditions in the U.S. Tech-heavy NASDAQ index is also up by more than 25% for the year amid the high-interest rate environment that continues to pose significant pressure to tech companies.

According to Morgan Stanley analysts’ lofty valuations pose a significant risk to investors intending to join the current bull run, especially on a potential correction. Likewise, he has warned that only a narrow breadth of stocks is driving the overall rally in the market. For instance, tech stocks have been on a roll amid increased focus and interest in stocks with exposure to artificial intelligence technology.

US Stock Market Outlook

Wilson has also warned that a resolution of the ongoing debt ceiling negotiations is unlikely to have a positive impact on stocks’ long-term outlook. The analyst expects any resolution to drive stocks higher in the short term, with any rally viewed as a false breakout or bull trap.

Morgan Stanley is not the first one or the only one to raise warning bells about the recent rally in the U.S. stock market. JPMorgan strategist Dubravko Lakos Bujas is also warning of potential market volatility as talks in Washington drag on.

Nevertheless, there are other strategists confident about the current bull run. For example, Bank of America’s Savita Subramanian remains bullish about the stock market outlook, sticking to a one year target of 4,300 for the S&P 500.

How stocks fare from current levels is highly dependent on various factors. For starters, any suggestion that the FED would hike interest rates further to try and bring inflation below the 2% threshold would be catastrophic.  The market has already priced in the FED, cutting interest at the end of the year.  Likewise, the lawmaker’s failure to reach an agreement on the debt ceiling could trigger another wave of uncertainty as the U.S. would end up defaulting on its financial obligations.

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