Morgan Stanley strategists say US stocks ignore Fed, earnings reality

US stocks are ripe for a sell-off after prematurely pricing in a pause in Federal Reserve rate hikes, according to Morgan Stanley strategists.

US equities have seen one of the strongest starts to a year on record, though the rally has started to cool as Fed chairman Jerome Powell’s outlook for further rate increases weighed on sentiment.

Last week, yields on US two-year notes exceeded 10-year yields by the most since the early 1980s, a sign of flagging confidence in the economy’s ability to withstand additional rate increases.Meanwhile, US equities have seen one of the strongest starts to a year on record, though the rally has started to cool as Fed chairman Jerome Powell’s outlook for further rate increases weighed on sentiment.

“The risk-reward is as poor as it’s been at any time during this bear market,” Wilson wrote. “The reality for equities is that monetary policy remains in restrictive territory in the context of an earnings recession that has now begun in earnest.”P 500 is currently in a short covering rally and could remain in a bear market for some time.

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