Morgan Stanley says concerns about a US slowdown may be about to get a whole lot worse

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  • US stocks crumbled again on Monday, logging a second consecutive session of 2% plus falls.
  • The three main US stock indices now sit at fresh multi-month lows.
  • Morgan Stanley says there’s a greater than 50% chance of a US earnings recession next year. It warns upcoming US data could exacerbate market concerns about a slowdown in the economy.

  • US stocks crumbled again on Monday with the Dow, S&P 500 and Nasdaq all losing more than 2%, adding to similarly-sized falls on Friday.

    The Dow now sits at the lowest level since April. The broader S&P 500 and tech-dominated Nasdaq have fared even worse, sitting at levels not seen since February.

    Markets are clearly pricing in the likelihood of a slowdown in the US economy next year, and with it a deceleration in earnings growth.

    Morgan Stanley’s US equity strategy team says it could be even worse than what markets are already anticipating.

    “At this point, the market is pricing in a material slowdown next year as sentiment and positioning have reached levels not seen since the last recession scare in early 2016,” it says.

    “We continue to think there is a 50% or greater chance of an earnings recession next year, defined as two consecutive quarters of negative year-on-year growth.”

    Morgan Stanley says upcoming US economic data may see broader concerns about the US economy intensify, raising the potential for continued declines in major US stock indices.

    “We have been expecting US PMIs to roll for a while now and think the evidence is continuing to mount,” it says.

    “What caught our eye last week was the dramatic fall in our Morgan Stanley Business Conditions Index which plummeted 21 points to a level of 35 in December, the lowest level since February 2016.

    Morgan Stanley

    “This index tends to move coincidentally with PMIs. It’s also the same signal that the relative performance of defensive equities versus their cyclical counterparts have been sending for some time.

    “Both indicators are telling us we may have an imminent collapse in the PMIs when the December data come out in early January.”

    And while investor sentiment is very pessimistic compared to recent standards, and market positioning less lopsided to the long-side following recent steep declines — two contrarian indicators that some may deem to be a buy signal — Morgan Stanley describes the recent price action in the S&P 500 as “hardly comforting,” predicting a “quick move to 2450”.

    It closed at 2546 points on Monday.

    “Most of the damage should come in those areas where valuations have yet to normalise and/or where positioning is still elevated,” it says.

    “Based on our work above, that means software and other expensive or crowded tech names, consumer discretionary and expensive healthcare stocks.

    “Once that occurs we would then expect a violent rotation toward cyclicals, out of defensives, as the Fed likely reacts more aggressively to such a move.”

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