Morgan Stanley says March will bring bear market risks for US stocks

(Bloomberg) — Morgan Stanley strategists say headwinds for US equities will intensify further in March as stocks come under pressure from volatile earnings and strong valuations.

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“Given our view that the earnings recession is far from over, we believe March is a high-risk month for the next round of stock declines,” strategists led by Michael Wilson, who ranked first in last year’s institutional investor survey after as the stock sell-off was correctly predicted, the note said on Monday.

The analysts’ suspension of earnings cuts for the next 12 months has given investors some optimism, Wilson said. However, bear markets tend to flatten out between quarterly reporting seasons before the downtrend resumes, he writes. “Stocks tend to figure this out a month early and trade lower, and this cycle perfectly illustrates that pattern.”

The S&P 500 has fallen for three consecutive weeks amid concerns that stable US inflation increases the likelihood of further rate hikes by the Federal Reserve. This followed a rally as much as 17% from the October lows fueled by hopes that the US central bank will soon abandon its hawkish stance.

“Given that uncertainty in fundamentals is rarely this high, technical factors could determine the market’s next big move,” Wilson said, noting that the S&P 500 has rebounded on its 200-day moving average. “We think this rally is a bull trap, but recognize that if these levels can hold, the stock market may have one last chance before we fully appreciate the decline in profits.”

For this to happen, he says, interest rates and the dollar must fall. If they climb higher instead, tech support should be out of action quickly, he added.

The strategist previously mentioned he expects stocks to fall in the spring, predicting the S&P 500 will fall 24% to 3,000 points in the first half of this year. He also repeated the call last week, stating that “the valuation is generally expensive.”

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