Fed's hawkish pivot is now the key hurdle for stocks, Morgan Stanley says

Investing.com -- Morgan Stanley believes the recent market pullback is progressing toward its final stages, but the bank warned in a note Monday that a shift toward tighter policy by central banks now represents the main obstacle to a recovery.

Analyst Michael Wilson writes that he remains convinced "that this is a correction in a bull market that started last April,” adding that the adjustment is “well advanced not only in time but price.”

Wilson notes that the S&P 500’s forward price-to-earnings ratio has fallen 15 percent since October, a valuation reset “as significant as what we experienced in the 2015 manufacturing downturn/global recession and the 2023 recession scare.”

What makes this episode unusual, he says, is that “forward earnings growth continues to accelerate, closing in on 20%,” which keeps the odds low that the current oil shock will end the business cycle.

The analyst also highlighted improving signals beneath the surface, pointing to a sharp move in the S&P/Gold ratio, which he calls “one of the more constructive recent market developments.”

The gauge, he writes, has historically bottomed when the United States “commits more forcefully to a major military conflict.”

Still, Wilson cautions that a “hawkish pivot by central banks needs to fade for the correction to end in nominal terms.”

He says Chair Jerome Powell was perceived as more focused on inflation risks, and the renewed negative correlation between bond yields and equities shows that dynamic “is back in play.”

Monitoring bond volatility and funding stress, he adds, will be key to identifying when policymakers shift back toward a more supportive stance.

You May Also Be Interested In

• Tesla Crash Into Texas Home Now Under Federal Safety Probe - WSJ
• Workday must face claims over AI hiring software bias
• S&P Global (SPGI) Declares $0.97 Quarterly Dividend; 1% Yield