US equity investors must remain cautious despite the economic rebound; watch cycles, taxation, inflation, politics

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Although the rebound is accelerating, the macroeconomic outlook calls on investors to prepare for a “hotter and shorter” mid-cycle transition, according to analysts at Morgan Stanley. (Image: REUTERS)

The global economy is rebounding strongly from the recession and is approaching pre-pandemic levels faster than expected. A significant fiscal stimulus and favorable monetary policy helped accelerate the recovery. However, as the rebound accelerates, the macroeconomic outlook calls on investors to be poised to prepare for a “hotter and shorter” mid-cycle transition, according to analysts at Morgan Stanley. “Investors may need to balance early cycle timing, mid-cycle conditions, and expensive end-of-cycle valuations – especially for US equities – while taking into account potential inflation, changes in the market. policy and higher corporate taxes, ”they added.

Neutral on US equities, favor reflation trade

Morgan Stanley believes a broader correction may be overdue for US stocks now. While analysts don’t see the Fed raising rates faster than expected, but expect the Fed to tighten further, the global brokerage firm now has a neutral rating on US stocks. “Mid-cycle transitions typically result in valuation contractions of 10-20%,” says Mike Wilson, chief US equities strategist.

Bucking the tide, the Morgan Stanley strategist said stimulus trading could be more lucrative for investors than reopening trading. “For example, the price / earnings multiples of consumer discretionary stocks have recently traded significantly higher than their historical ratio. Bank stocks, on the other hand, are relatively close to their historically low valuation levels and should benefit from improving macroeconomic conditions and potentially higher rates, ”they stressed.

Opt for thematic investing

In addition, anticipating a limited rise in the main stock market benchmarks, Morgan Stanley advises investors to opt for thematic investment strategies that generate alpha. Some of the ideas here include examining the dissociation between the United States and China in key economic areas that could impact global business strategy and the investment landscape.

Additionally, they said covid-19 has accelerated the current IT cycle, presenting opportunities, not only for the tech industry, but also for advanced users. Morgan Stanley analysts are also advising investors to keep track of an expected increase in business spending. “This theme sits at the crossroads of other big ideas, including data, decarbonization and de-globalization,” they said.

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