MS - Growth Is a Bigger Risk than Inflationpdf
MS - Growth Is a Bigger Risk than Inflationpdf
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  1. M Global FoundationSunday Start | What's Next in Global MacroGrowth Is a Bigger Risk than InflationMorgan Stanley & Co. LLCMichael J WilsonEquity StrategistM.Wilson@morganstanley.com+1 212 761-2532I am fond of the saying that the economy is not the stock market and the stock market is not the economy. Often, a strong economy is not good for stocks, while a soft one can drive a very bullish tape. This latter case is the classic 'late cycle' period in which we find ourselves, in our view. More specifically, when the economy is slowing from prior tightening by the Federal Reserve, the equity market often starts to get excited about the Fed reversing course and valuations rise in anticipation. With P/E multiples and other valuation metrics now in the top decile, the question is, “Will valuations begin to fall faster than earnings growth and lead to a meaningful correction?” At the stock level, this is already happening, as illustrated by the extremely weak breadth (Exhibit 1). Most stocks are seeing valuations fall more than earnings are rising – which is why stock picking has become so important for active investors this year. While this can create great long/short opportunities, the list of longs has become harder to find, and the momentum in a few stocks continues almost unabated. This also syncs with our view for the past year that Large-Cap Quality is likely to continue to outperform until something changes in the macro environment. More specifically, we see three potential risks to equity markets: 1. Inflation and growth reaccelerate in a way that leads the Fed to reconsider rate hikes. Right now, that does not appear likely to us, and it appears that minimal risk of such an outcome is priced into both bond and stock markets. We’d expect a growth reacceleration outcome to lead to a broadening out of the equity rally to areas that have lagged persistently over the past two years – i.e., small caps, lower-quality consumer cyclicals, regional banks, transport, etc. It’s unclear if this would be good for the S&P 500 as higher rates would potentially weigh on valuations for the big winners. 2. The liquidity picture deteriorates in a way that leads to equity outflows. A key risk in this regard relates to the funding of the extraordinary government deficit. A good way to monitor this risk is the term premium, which remains near zero. Should this change and the term premium rise like last fall, we’d expect a broad decline in equities, with few stocks doing well. This does not appear to be a concern at the moment given the various liquidity provisions still in place – i.e. reverse repo, overfunded Treasury General Account, and the Fed beginning to taper QT. 3. A growth scare that is substantial enough to turn bad economic data into bad news for equity multiples across the board. We think this is the most likely risk, and our conversations with clients echo this view. Under this outcome, Large-Cap Quality should outperform moderately on a relative Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.June 23, 2024 06:00 AM GMT
  2. M Global Foundation2basis but Defensives are likely to do better – i.e., go down less. As highlighted in our most recent research, economic growth surprise indices have been trending lower all year, with the index making a new low this past week (Exhibit 2). So far, the S&P 500 has taken the weaker data in its stride while treating bad economic data as still good for Large-Cap Quality stocks given expectations of Fed rate cuts. Meanwhile, several other indices have broken down, with some now negative on the year. The bottom line is that the ongoing policy mix of heavy fiscal spending and tight interest rate policy is crowding out many companies and consumers in way that is unsustainable, in our view. Investors have recognized this outcome by bidding up the few stocks of the companies that are doing well in this environment. Until the bond market pushes back via a higher term premium, or growth slows down in a more meaningful way, we expect this narrow market performance to persist. As such, we continue to recommend a barbell of Large-Cap Quality Growth with Defensives, while fading Cyclicals and avoiding the temptation to play for a true broadening out. Enjoy your Sunday.Send Us FeedbackExhibit 1:Breadth is exceptionally weak even for the strongest equity indices – SPX and NDX Source: Bloomberg, Morgan Stanley Research Exhibit 2:The Economic Growth Surprise Index has been weak this year and is making new lowsSource: Bloomberg, Morgan Stanley ResearchWhat I'm Reading This WeekUS Equity Strategy: Weekly Warm-up: As Data Softens, Growth Becomes More
  3. M Global FoundationMorgan Stanley Research3Important for Stocks US Equity Strategy: Weekly Warm-up: Mixed Data Supports Our Quality BiasUS Thematics: Convenience Is a Compelling Product US Equity Strategy: US Equities Mid-Year Outlook: A Wider Range of Outcomes and Opportunities What We Are Watching This WeekMONDAY, JUNE 24Germany ifo: We expect ifo Business Climate to increase to 89.7 in June from 89.3 in May.TUESDAY, JUNE 25US Conference Board Consumer Confidence Index: We forecast that the confidence index falls to 97.8 from 102.0 in May. A net 24.0% called jobs "plentiful" in May, high historically but below pre-pandemic levels.Canada CPI: Consensus expects headline inflation to slow to 2.6%Y in May versus 2.7%Y in April.WEDNESDAY, JUNE 26Australia May CPI: We expect headline CPI for May to have risen to 3.8%Y from 3.6%Y the prior month, driven by base effects and despite a small monthly decline in prices.THURSDAY, JUNE 27US 1Q24 GDP (Third Revision): We expect a slight upward revision to GDP but the same broad pattern of strong private domestic spending despite the slowdown in output (GDP) in 1Q.Euro Area EU Commission Economic Sentiment: We forecast economic sentiment to improve to 96.5 in June from 96.0 in MayJapan Retail Sales: We forecast retail sales to increase by 2.2%Y in May.Philippines BSP Monetary Policy Meeting: We expect the BSP to stay on hold at its upcoming meeting.Mexico Banxico Monetary Policy Meeting: We expect Banxico to hold rates constant at 11.00%. FRIDAY, JUNE 28US University of Michigan Consumer Sentiment: The preliminary June sentiment index fell but has maintained some of its recent increase from very depressed levels. US Personal Income and Spending: Personal income is forecast to increase by 0.4%M in May versus 0.3%M prior, driven by strong labor income. Personal spending is forecast to increase by 0.2%M versus 0.2%M prior.US PCE Inflation: We forecast that core PCE prices rose by 0.10%M and headline PCE prices were unchanged (0.0%M) in May.Japan Unemployment Rate and New Job Offers/Application Ratio: We
  4. M Global Foundation4expect the unemployment rate to be at 2.6% in May and the new job offers/application ratio to be at 1.26.Japan New Housing Starts: We expect that new housing starts were 0.82 million SAAR in May.Japan Industrial Production: We forecast that May industrial production increases by 1.8%M and decreases by 0.6%Y.Japan Tokyo CPI: Our forecasts for the June Tokyo CPI are: All items +2.4%Y, All items less fresh food: +2.0%Y, All items less fresh food and energy: +1.7%Y.India Current Account Balance: We expect the current account to swing to a surplus of 0.9% of GDP in 1Q24 from a deficit of 1.2% in 4Q23, led by a moderation in the goods trade deficit as exports grew at a faster pace relative to imports, even as the surplus in the invisibles trade balance softens from previous quarter levels.SUNDAY, JUNE 30China Manufacturing PMI: We expect NBS manufacturing PMI to stay unchanged at a subdued level of 49.5 in June.
  5. M Global FoundationMorgan Stanley Research5Disclosure SectionThe information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley & Co. LLC and/or Morgan Stanley C.T.V.M. S.A. and/or Morgan Stanley México, Casa de Bolsa, S.A. de C.V. and/or Morgan Stanley Canada Limited and/or Morgan Stanley & Co. International plc and/or Morgan Stanley Europe S.E. and/or RMB Morgan Stanley Proprietary Limited and/or Morgan Stanley MUFG Securities Co., Ltd. and/or Morgan Stanley Capital Group Japan Co., Ltd. and/or Morgan Stanley Asia Limited and/or Morgan Stanley Asia (Singapore) Pte. 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Alternatively you may contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Nicholas Lentini, CFA; Andrew B Pauker; Michelle M. Weaver, CFA; Michael J Wilson..Global Research Conflict Management PolicyMorgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. 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  6. M Global Foundation6Coverage UniverseInvestment Banking Clients (IBC)Other Material Investment Services Clients (MISC)Stock Rating CategoryCount% of TotalCount% of Total IBC% of Rating CategoryCount% of Total Other MISCOverweight/Buy145539%33845%23%68341%Equal-weight/Hold174246%34246%20%77446%Not-Rated/Hold30%00%0%10%Underweight/Sell57315%709%12%22313%Total3,7737501681Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Due to rounding off of decimals, the percentages provided in the "% of total" column may not add up to exactly 100 percent.Analyst Stock RatingsOverweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months.Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis over the next 12-18 months.Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index or the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.Analyst Industry ViewsAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.Important Disclosures for Morgan Stanley Smith Barney LLC & E*TRADE Securities LLC CustomersImportant disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website at www.morganstanley.com/online/researchdisclosures. 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