According to Morgan Stanley, achieving an economic state characterized by moderate growth and low inflation, defined as a “Goldilocks” scenario, is becoming increasingly difficult.
The financial institution’s latest analysis highlights the stock market’s response to the Federal Reserve’s expected interest rate cut in September. This hope emerged after a dramatic drop in inflation in June, which led to a sharp decline in US government bond yields and a shift in the best-performing stock market sectors.
Morgan Stanley said the S&P 500 index, after hitting its all-time high of 5,667, fell 3%. By comparison, the Nasdaq Composite index, which includes a large percentage of large technology companies, fell more than double.
The Russell 2000 index, which represents the smallest companies, instead recorded an increase in value of more than 10%. During this period, stocks considered “value” performed better than those considered growth-oriented, sectors sensitive to business cycles outperformed those less sensitive, and those stocks considered to be of lower quality are more than those considered to be of higher quality.
Notably, more than 80% of stocks traded above their 200-day average, suggesting growing confidence in a mild and controlled economic slowdown.
However, Morgan Stanley cautioned that economic data was inconsistent and that the company’s earnings reporting period showed some positive surprises. Furthermore, there is a downward trend in expectations and some doubts about the profitability of investments in generative artificial intelligence. According to experts, this shows that stock market movements are largely dependent on changes in valuation measures and interest rate forecasts.
Morgan Stanley’s Global Investment Committee (GIC) maintained a cautious stance, acknowledging that while it expects a slight slowdown, the path to it is fraught with potential difficulties.
American consumers are increasingly relying on jobs to support their spending, business leaders are expected to significantly improve profit margins, and global economic growth is slowing amid growing uncertainty over government policy. . Considering these factors, they suggest that the possibility of errors by the Federal Reserve remains significant.
Morgan Stanley recommends focusing investments on different types of assets, paying attention to the right valuations and choosing stocks that offer growth at a reasonable price. He suggests preferring a version of the S&P 500 that gives equal weight to all stocks or picking stocks individually, focusing on quality companies that are sensitive to economic cycles or not. less sensitive, which recommends avoiding the impulse to invest heavily in smaller companies that are recent. gained value or in a select group of seven particularly successful large companies.
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