Wall Street equity indices scaled fresh highs in August, devoid of the backing of any financial or profit basic, stated Lisa Shalett, Chief Investment Officer, Morgan Stanley Wealth Management when adding that this up-move has pushed US stocks into the overpriced zone. Looking ahead, Shalett added that two elements could now serve as catalysts for a close to-term pullback in stock indices. The NASDAQ gained 4% through the preceding month when S&P 500 jumped 2.9% and Dow Jones inched 1.9% larger. The 3 benchmark indices scaled all-time highs in August.
According to Lisa Shalett, US stock marketplace investors have ignored several danger elements, such as the resurgence of Covid-19 hospitalizations in the US, falling customer self-confidence, larger interest prices and important shifts in geopolitics in China and the Middle East. This has largely been led by the US Fed’s efforts to effectively convince investors that it is in rush to enhance prices.
Interest prices
The 1st of the two catalysts seen by Morgan Stanley Wealth’s CIO is interest prices, which she stated could rise. “We see real rates rising, not only as the Fed is expected to start reducing its bond purchases but also as global economies recover, which could encourage foreign investors who have flocked to Treasuries as a “safe haven” to move their funds elsewhere,” Shalett stated.
If interest prices surge, it could influence the value-to-earnings several of stocks. Currently, P/E multiples of stocks are effectively above historic highs. Although smaller-capitalization stocks, cyclicals and dividend-payers have retreated from year-to-date highs but mega-capitalization technologies leaders have not stated Lisa Shalett.
Corporate earnings
Further, the second catalyst seen is the possibility of waning corporate earnings. “Year-to-date earnings have been spectacular—full-year 2021 earnings estimates are up by more than 20% from their levels at the start of the year. However, we are concerned about the sustainability of operating margins, given the headwinds to corporate profitability: higher taxes, more aggressive regulation, higher input costs, higher cost of labour and a weaker U.S. dollar,” Lisa Shalett stated.
These two elements could fuel a close to-term marketplace correction. “Such a breather could help restore risk premiums and preserve potential returns for the selective stock picker,” Morgan Stanley Wealth’s CIO stated. To prepare for the stated catalysts, Lisa Shalett advises investors to rebalance their portfolios towards higher-top quality cyclical stocks, as effectively as dividend-paying names in customer staples, customer services and wellness care.