Morgan Stanley is doubling down on its bearish call for the stock market, warning that a correction is coming given an impending breakdown in the strength of growth stocks.
In a new research report covered by MarketWatch, the Wall Street firm argues that one of the main lifts to stocks in the U.S.-- an ongoing jump in the prices of technology and Internet stocks over the past few years -- is starting to peter out as the economy enters the late stages of the cycle. Although stocks have been rising recently, Morgan Stanley expressed worries about the number of stocks that are moving higher compared to the amount that are declining. (See also: Morgan Stanley Says Biggest Correction Since Feb Looming.)
Too Few Stocks Carrying The Market
“Fewer stocks are carrying the load of the market, a sign of exhaustion and, in our view, a bad signal for further price gains,” Morgan Stanley wrote in the research note. Apple Inc.’s (AAPL) more than $1 trillion market capitalization milestone may have been applauded by investors but to Morgan Stanley, it “sure sounds like a ‘ringing of the bell’.” Instead of viewing the $1 trillion market cap Apple now commands “that all is right with tech “ it may be “meaningful historical market for a tradable top,” Morgan Stanley wrote in the note, reported MarketWatch. The Wall Street firm warned a “breakdown in both legs of momentum” is coming and that it could be a “trigger for a significant market correction.”
Technology and Internet stocks are the most obvious growth stocks, but Morgan Stanley warned the entire group is at risk as defensive stocks outperform and weakness in growth continues to show up. Given that “discretionary are quant investors” are exposed to momentum stocks any remaining weakness could drive more rotations out of the group, Morgan Stanley said. It “will not be good for price momentum leaders — i.e. Tech and other leading growth stocks — or the market.” (See more: Disney, Amgen Benefit From Shift to Value Stocks.)
Stocks Are In ‘Rolling Correction’
This isn’t the first time Morgan Stanley has warned about a looming stock market correction. Earlier this month it predicted the Nasdaq could correct by 15% or more while the S&P 500 could decline 10%. During an appearance on CNBC, Michael Wilson, the Morgan Stanley analyst, said financial conditions are tightening more than investors think and that the correction is already in the process. “Every sector within the S&P has gone through about a 20% correction on valuation except for two: technology and consumer discretionary—basically growth stocks," said Wilson. "Our view is that this rolling bear market has to complete itself by hitting those two sectors, and we think that's actually begun." The analyst expects the S&P 500 Index to end the year at 2,750, which would be 4% lower than the high of 2,872 reached on Jan. 26 and around 4% lower than where it's trading now. The strategist still likes energy, utilities, industrials and financials, arguing investors should consider rotating out of growth and into value stocks.