SUPERNEWS

Macro

Morgan Stanley Eyes Inflation Data for Stock Path, S&P Up 14%

Upcoming US inflation data crucial for Fed's rate decisions, as Morgan Stanley strategists eye market impact and central bank cues.

By Athena Xu

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5/6, 05:23 EDT
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Key Takeaway

  • Morgan Stanley views next week's US inflation data as crucial for stock market direction and Fed rate cut expectations.
  • S&P 500's recent rise reflects optimism for Fed easing, despite trading 14% above Morgan Stanley's target.
  • Strategists recommend a balanced investment in quality cyclicals and growth stocks amid economic uncertainty.

Inflation Data Awaits

Next week's US inflation figures for April, due on May 15, are highly anticipated by investors and strategists alike, as they could significantly influence the Federal Reserve's interest rate decisions. Morgan Stanley strategists, led by Michael Wilson, emphasize the importance of this data in shaping monetary policy and market expectations. The recent cooling of the labor market, as indicated by the smallest gain in jobs in six months, has fueled speculation that the Fed might commence rate cuts as early as September. This speculation has contributed to a buoyant mood in the equity markets, with the S&P 500 rallying in anticipation.

Market Sentiment and Strategy

The uncertain economic backdrop has led to a cautious investment approach. Michael Wilson of Morgan Stanley suggests a balanced investment strategy, favoring a mix of quality cyclicals and growth stocks. This recommendation comes amid fluctuating market pricing and sector leadership, as investors navigate between the potential for a soft or no-landing scenario for the US economy. The recent performance of the S&P 500, which has surpassed Wilson's 12-month target, reflects the market's optimism and the influence of solid corporate earnings.

Central Bank Speeches in Focus

With a relatively light US economic calendar, attention turns to a series of central bank speeches scheduled for the week. Remarks from ECB Chief Economist Philip Lane and Fed officials, including John Williams and Neel Kashkari, are eagerly awaited for insights into future monetary policy directions. These speeches could sway market sentiment and trading strategies, especially in light of recent data pointing towards a potential easing of inflationary pressures and the possibility of interest rate cuts.

Earnings Season and Economic Indicators

The earnings season has revealed that while a significant majority of S&P 500 companies have beaten profit expectations, the market's reaction has been muted, highlighting concerns over future profit outlooks. Guidance from companies has become a critical factor, with only a small percentage exceeding estimates. This cautious outlook is set against a backdrop of high valuations and the need for either improved guidance or lower interest rates to sustain the market rally. Upcoming reports from major retailers and consumer sentiment indicators will be crucial in determining the market's direction.

Street Views

  • Michael Wilson, Morgan Stanley (Neutral on the trajectory of equities and Federal Reserve interest rate cuts):

    "The price reaction on the back of this release may be more important than the data itself given how influential price action has been on investor sentiment amid an uncertain macro set up."