Bond Yields

Morgan Stanley: The stock market is at a tipping point, time to dump growth stocks for value

According to Morgan Stanley, we may have reached a tipping point for equities as a result of the recent steady rise in bond yields. We are on the cusp of what may be a change in the investment themes favouring growth stocks over value stocks.
In a research note, Morgan Stanley Equity Strategist, Mike Wilson says that rising interest rates and bond yields are signalling the potential for end-of-cycle risks, and that would not only cap stock market gains, it would also precipitate intra-market rotations.

In the past, Wilson has said he believes that we are already in a multi-year bear market, and that gains in the stock market would be limited on account of the S&P 500 becoming rangebound in a channel between 2,400 and 3,000 points over the next number of years.

"Yields are rising, but growth will likely slow next year, which means portfolios need to shift," wrote Wilson, in his note.
On a relative basis, Wilson says value stocks should outperform growth in the coming period, as we are likely to see more downside in small caps and high multiple growth cyclicals such as consumer discretionary and technology.

"With S&P 500 upside capped on a valuation basis, it's more likely that Value outperforms by going down less or simply not going down," he wrote.

In the note, Wilson says that asset allocators and investors may be forced to consider moving assets from growth stocks to value.

In addition to the strong employment report last week, Fed Chair Powell's hawkish stance, and robust Services ISM, bond yields may also have risen in reaction to the potential prospect of Republicans sweep in Congress, in the upcoming mid-term election.

"If the market begins to believe that a Republican sweep is likely to occur in the midterms, the likelihood of a tax cut extension, infrastructure spending and continued focus on trade protectionism all rise. We view these potential policy paths as inflationary and likely to add to the deficit, providing upward pressure on rates," wrote Wilson.

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