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For Morgan Stanley, slowdown in US growth is worse than expected

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Following a recent drop in bond yields, investors are betting that the Federal Reserve may turn less aggressive if inflation peaks in the second half of the year, but “any drop in rates should be interpreted more as growth concern than potential easing from the Fed”, strategists led by Michael J. Wilson wrote in a note.

The S&P 500 is coming off its worst first half in more than 50 years as investors fear a toxic combination of a more aggressive Fed and rising inflation will cause an economic contraction.

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If macroeconomic data doesn’t confirm a recession, stock markets could rally further, according to Morgan Stanley, but if growth contracts, the S&P 500 could sink to 3,000 points, about 22% below its last close, it said. Wilson.

Wilson, one of Wall Street’s loudest bears who correctly predicted this year’s sell-off, sees the S&P 500’s fair value target at around 3,400 to 3,500, or as little as 11% below current levels. As interest rates and equity risk premiums begin to reflect slowing growth more accurately, equities are likely to be buoyed by second-quarter earnings from here, he said.

With forward earnings estimates for the S&P 500 and Nasdaq 100 more than 20% above trend following the global financial crisis, there are signs that earnings expectations will be lowered in the coming months, Wilson said.

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Until earnings estimates are lowered to more reasonable levels or valuations reflect that risk, the bear market is not complete.“, wrote.

The market is rewarding earnings stability, and defensive industries including telecommunications, utilities, insurance, real estate, some parts of consumer staples and health care look favorable when risk is assessed. profit, he said. Tech hardware and semiconductors, on the other hand, are at greater risk, according to Morgan Stanley.

Source: Gestion

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