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Morgan Stanley sees Fed as greater threat to stocks than omicron

Bloomberg

Stock investors probably have more important things to worry about than the emergence of the new coronavirus strain, according to Morgan Stanley’s strategists.
While “not that concerned about omicron as a major risk factor for equities,” the strategists led by Michael Wilson see headwinds building elsewhere, after Federal Reserve Chairman Jerome Powell signaled the possible accelerated tapering of asset purchases. “Tapering is tightening for the markets and it will lead to lower valuations like it always does at this stage of any recovery,” the strategists wrote in a note to clients.
Brian Nick of Nuveen, the investment arm of TIAA, with $1.3 trillion in assets under management, also said that “the major risk to our outlook remains a sudden tightening of financial conditions if central banks are forced to respond to inflation driven by an overly tight labour market.” In contrast, most of the economic and market risks associated with the virus “are behind,” according to Nuveen’s
outlook for 2022.
Other strategists, including those at JPMorgan Chase & Co, have also singled out a hawkish turn by central banks, and not Covid-19, as the main risk to their outlook for stocks. But while JPMorgan reiterated that its base-case scenario is for the equities rally to continue into next year, Morgan Stanley sees the S&P 500 trending lower, and valuations declining.
“Equity markets are resuming their de-rating process that began over nine months ago for numerous reasons,” the Morgan Stanley strategists wrote. They forecast that the S&P 500 forward price-to-earnings ratio would fall by about 12%, with that decline potentially deeper “as equity investors start to demand much higher risk premiums in anticipation of considerably higher long-term interest rates.”
Even the usually bullish UBS Global Wealth Management strategists said they “expect a period of heightened volatility ahead as investors attempt to assess the risks from omicron and the Fed, based on insufficient and patchy data.” While they advise investors to refrain from a hasty exit from risk assets, the strategists, led by Mark Haefele, said monetary tightening could present a bear case to their base scenario.
Technology stocks, which are more sensitive to monetary tightening, underperformed, and Nasdaq 100 futures contracts pointed to a drop, while their peers at the S&P 500 index were in the green.

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