The recent stock-market recovery is likely just a bear market rally, and 'significant risks' lie ahead says Morgan Stanley exec

  • The recent uptick in stocks is just a bear-market rally and unsustainable, a Morgan Stanley exec said.
  • The outlook for equities is still damp, given that many investors and banks think a recession is inevitable.
  • A previous Morgan Stanley note forecasted a 20% S&P 500 sell-off amid serious worries about the market’s future.

Some investors have been encouraged by the recent uptick in stocks, but a top wealth-management executive at Morgan Stanley thinks there are signs it’s only a bear-market rally — and that significant dips may still lie ahead for the market.

“As tempting as it is for us to get excited about this rally and about some of the positive earnings that are coming up, we can’t discount the fact that there still are so many risks that this market is facing,” Katerina Simonetti, senior vice president at Morgan Stanley Private Wealth Management, said in an interview with Bloomberg.

As for why she doesn’t see ongoing gains as sustaintable, Simonetti first pointed to investor sentiment, which still remains poor.

“Most of the investors actually think that, recession, either deep or shallow, is pretty inevitable,” she said. It’s a dark forecast that has been reiterated by Goldman Sachs, Morgan Stanley, Wells Fargo, Pimco, and other investment banks who think there’s at least a mild recession to come.

Simonetti also noted that the market continues to be plagued by inflation and ongoing labor shortages, which could slam some firms with high production costs and low production. The most recent CPI report clocked in at a 41-year high at 9.1%, and as of July, 3.25 million workers dropped out of the labor force since February 2020, according to the Bureau of Labor Statistics.

“There are significant risks that are still facing this market,” she said of market conditions. “We probably are going to seeing a lot of choppiness and some potential further declines in the market before the year-end.”

Other firms on Wall Street are in agreement: earlier this month, analysts from Bank of America and Morgan Stanley slashed their end-of-year S&P 500 forecast by around 20%, casting some doubt on whether investors will be able to make it through the year with a positive return. 

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