Morgan Stanley just downgraded its allocation to global equities to Underweight from Equal-weight.
“The most straightforward reason for this shift is simple – we project poor returns,” wrote Morgan Stanley chief cross-asset strategist Andrew Sheets in a note to clients on Sunday. “Over the next 12 months, there is now just 1% average upside to Morgan Stanley’s price targets for the S&P 500 (^GSPC), MSCI Europe, MSCI EM and Topix Japan.”
The S&P 500 is up 19.3% so far this year and has touched record highs in recent days on hopes the Federal Reserve will cut interest rates in the coming months after raising them aggressively in 2018. But that fuel from the Fed may not be enough to help the stock market, according to Sheets.
“Our concern is that the positives of easier policy will be offset by the negatives of weaker growth,” he noted. “We think a repeated lesson for stocks over the last 30 years has been that when easier policy collides with weaker growth, the latter usually matters more for returns.”
Aside from weaker global growth, Morgan Stanley doesn’t see corporate earnings helping the stock market picture. Second quarter earnings season begins this week with Pepsico (PEP) and Delta Air Lines (DAL) reporting.
“On earnings, we think the market is underpricing the risk that companies lower full-year guidance. Just think about how much has changed since 1Q reporting in mid-April,” Sheets wrote. “A U.S.-China trade deal that was widely expected to be resolved led instead to a new round of tariffs. Global PMIs have continued to fall.”
Morgan Stanley’s most favored asset class is emerging-market fixed-income.
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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