Morgan Stanley strategists say stock markets could have already priced in the bullish narrative of the U.S. economic rebound in March, aided by the reopening of businesses after a ramp-up in covid-19 vaccinations.
With a lot of good news coming out of the Federal Reserve and analysts sentiments turning towards future earnings, investors are questioning to what degree the good news and optimism can be counted on.
“This year, equity markets have continued to advance but with violent rotations that have left many portfolios gored like the annual running with the bulls in Spain,” Morgan Stanley U.S. equity strategists said in a weekly market note titled “Running with the Bulls Can Be Dangerous”.
“At this point, the bullish narrative of a recovering/reopening economy is very much the consensus view. That doesn’t make it wrong, but markets are discounting machines and may already reflect the recovery from last year’s sharp recession,” the note said.
This, however, does not mean a dearth of bullish stocks. The note highlighted that the bull market in stocks will continue with value and cyclicals leading the way rather than the tech sector.
Tech stocks have declined sharply since peaking on Feb. 16. They dragged the Nasdaq 100 down more than 10 percent despite a constant stream of good news in March.
The Morgan Stanley strategists said there was likely to be a supply shortage as the consumer demand “comes roaring back.”
U.S. consumer confidence raced in March to its highest level since the start of the covid-19 pandemic, supporting views that economic growth will accelerate in coming months, driven by more fiscal stimulus and an improving public health situation.
“This means higher costs or even missed sales altogether. We suspect these higher costs will not be passed on completely and believe incremental operating margins may have peaked for the cycle,” they said.
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