Morgan Stanley and BlackRock analysts are sounding the alarm that equity valuations and market fundamentals aren’t in line with one another.This post first appeared in 10 Before the Opening Bell, a newsletter by Insider that brings you the inside scoop on what traders are talking about — delivered daily to your inbox. Sign up here. Download Insider’s app here.
The stock market could continue to tumble in the face of rising inflation and a recession.
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1. The stock market is “disconnected” from reality. At least that’s what Morgan Stanley’s Mike Wilson thinks.
In a Monday note to clients, analysts led by Wilson said valuations in equities don’t resemble the current economic and earnings landscape.In other words: Stocks have room to fall and the bear market is not yet over.Markets are getting ahead of themselves as they’ve priced in an extended pause in Fed rate hikes after July’s 8.5% CPI reading. But to Wilson, that reading hasn’t eased fast enough — so it’s unlikely to justify a dovish pivot by the central bank.”That development leaves equity multiples significantly disconnected from fundamentals which continue to suggest we’re in a late cycle, slowing growth environment.”
Similarly, BlackRock analysts said the current rally isn’t here to stay, as deteriorating earnings and a still-aggressive Fed will keep pressure on stocks.While the S&P 500 has jumped about 18% from its June lows and the Nasdaq is riding a 20% bump, the asset manager said investors shouldn’t hold their breath for more upside. “We’re not chasing the rally,” BlackRock said. “Why? First, market expectations for a dovish [Fed] pivot are premature. We think a pivot will come later as the Fed is for now responding to pressure to tame inflation. Second, we see the market’s views on earnings as overly optimistic.”You can listen to me chat more on this in today’s episode of The Refresh from Insider.In other news:
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2. US stock futures largely dip early Tuesday, as investors eagerly await earnings from some of the world’s b …