Stock Market Outlook: Bull market faces bearish cocktail, Morgan Stanley warns

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The stock rally is facing a bearish cocktail as falling inflation eats into profits and the Fed saps $1.2 trillion in liquidity out of the market, Morgan Stanley says

. Those losses could collide with other pressures that could weigh on stocks, particularly as politicians mull hefty government spending cuts and Fed continues to reduce the size of its balance sheet, which will further tighten financial conditions.

Government spending cuts could notch $1.5 trillion over the next decade, according to estimates from the Congressional Budget Office, a move that's expected to weigh GDP down 2% over the next year. Meanwhile, $1.2 trillion in Treasurys will be issued over the next six months and weigh on liquidity, which could be a major headwind for stocks.

"This should begin to hit asset prices by the end of this month and carry into the fall. In addition to this domestic dynamic, we think global M2 growth is also likely to flatten out and possibly fall again, adding one more element to the cocktail that could surprise newly minted bulls," strategists added.

Wall Street experts have been divided on the current rally in stocks, with some commentators warning of a sharp pullback as the US still faces an elevated risk of recession. The economy has a 71% chance of tipping into a downturn by May 2024, according to the

 

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