Easing rates and oil pressures are providing short-term relief for the stock market, but they are an indication more of growth worries than an inflation peak, Morgan Stanley says.
This "recent decline in bond yields (TBT) (TLT) (SHY) has been perceived as positive for equities - ultimately a misread, in our view," strategist Mike Wilson said. "For this read to continue to hold, we'd likely need to see a continuation of falling yields in the context of cresting inflation pressures, an associated less hawkish Fed policy path, more durable economic growth than we expect and a re-acceleration in earnings revisions."
"The combination of those factors is feasible, but is not likely, in our view," Wilson said. "Thus, we see the recent rebound in equities as another bear market rally that could rise another 5-7% in the best case scenario."
"The S&P 500 (SP500) (NYSEARCA:SPY) is trading back at 16.3x or 1 turn higher than where it was trading at the prior week's lows ... this seems hard to justify given the growing concern about earnings," he added. "As a result, we continue to believe any near term rally is nothing more than a bear market bounce with lower lows ahead."
"The only question is whether we have a soft landing (base case) in which the S&P 500 bottoms near 3400-3500 or we have a recession (bear case) in which the index falls toward 3000."
The S&P is pricey on 14 of 20 metrics tracked by BofA.