The Tell: ‘Some twisted logic about valuation multiples’: Stock-market investors appear complacent as rates rise, warns Morgan Stanley

by | Sep 19, 2022 | Stock Market

The stock market has been complacent in the face of rising real yields and expectations for a higher terminal value for the federal-funds rate, moves seen in the bond market following hotter than-anticipated inflation in August, warns Morgan Stanley’s wealth-management division. “You would have expected the stock market to react by lowering valuation multiples and marking down earnings estimates,” said Lisa Shalett, Morgan Stanley Wealth Management’s chief investment officer, in a note Monday. “Neither has happened.”

Yields in the U.S. Treasury market have continued climbing since the Labor Department on Sept. 13 released data from the consumer-price-index showing inflation was stronger than expected in August. Rates have been on the rise as investors anticipate the Federal Reserve will at the conclusion of its policy meeting on Wednesday announce another large rate hike to combat soaring inflation.  “For most investors, ‘higher for longer’ refers to inflation and, in turn, the terminal level of the fed-funds rate during this historic hiking cycle,” said Shalett.  “The implication, at least for the U.S. Treasury market, is that real rates across the entire yield curve are likely to march higher,” she said. “But in the stock market, ‘higher for longer’ apparently refers to some twisted logic about valuation multiples.” The equity market has been relatively resilient as investors appe …

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