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In the first quarter, global equities rallied thanks to increased liquidity, rising global growth expectations, and general improvement in sentiment towards stocks.But Morgan Stanley’s Adam Parker already poured cold water on the stock market’s bull run, saying he expects the S&P500 to end the year at 1,167.
Macro data is expected to weaken while geo-political uncertainties are expected to pose a risk for the rest of the year.
Going into the second quarter, Morgan Stanley’s Matthew Garman and his team have identified three key drivers of stock market performance:
1) First, liquidity injections are less likely, and global growth expectations will take over as the key driver stock market performance moving forward.
- In the U.S. the economic surprise index has fallen from 92 in January to 5 now and the improvement in the labour market looks to be slowing. The labour market, both jobs and incomes, gas prices and bank lending are key indicators to track in the second quarter.
- In emerging markets, data from China and emerging markets has been subdued, but Morgan Stanley’s economics team thinks China will continue to be the growth engine forecasting 9 per cent growth this year. Indicators to watch include commodity prices, emerging markets exports, and the Chinese real estate sector.
- In Europe macro data is getting worse and key indicators to track include business and consumer confidence surveys, labour market data in peripheral countries and earnings revisions.
2) Lending and money supply data from the European Central Bank (ECB) has been weak recently and causes Morgan Stanley analysts to think that the LTRO did little to change the underlying growth outlook. Bank of England’s credit conditions also look weak. The concerns over Spanish debt, uncertainty surrounding Greek/French elections, and bank credit ratings downgrades suggest that liquidity and sovereign debt markets in Europe are another key indicator to watch for.
3) Finally, Garman says it’s important to watch valuation and sentiment indicators, and that for now sentiment indicators are giving mixed signals. He does think equities could benefit from a shift in capital flows to equities from bonds.