S&P 500 to see 4700 if yields stay high, warns Morgan Stanley
April hasn’t been very welcoming for US stocks so far as higher rates continue to pressure valuations and heavy fiscal spending complicates efforts to tame inflation. As a result, theAccording to Morgan Stanley equity strategists, the weak performance in equities in April comes primarily due to the repricing of anticipated Federal Reserve rate cuts and the subsequent increase in back-end rates.
Looking forward, if yields remain at their current levels over the next three months, equity multiples could experience a modest additional downside of around 5%, assuming all other factors remain constant. That would translate to the S&P 500 dropping to the 4,700 - 4,800 range, they said. Secondly, this stimulus contributed to a sizable budget deficit, which in turn led to a challenging funding environment and an increased term premium last summer and fall.
“In short, the squeeze from lower coupon issuance and dovish commentary from the Fed resulted in a dramatic fall in rates,” they added. “As a result, the bond market has run with this hotter than anticipated data and is now pricing just 1.5 cuts this year,” Morgan Stanley’s team pointed out. “In a worst case scenario, some are wondering whether the Fed may even have to hike rates again. Time will tell, but the recent reversal in data has put the Fed back in hawkish mode, and that presents a headwind for valuations,” they said.
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