Stock market ‘tipping point’ means pain for most beloved companies

A stock-market “tipping
point” has been reached, according to Morgan
Stanley.
csdailyblog

• Morgan Stanley says surging bond yields could spark a
  shift in US allocations towards value stocks from their
  high-flying growth counterparts.
• It favors energy, utilities, and financials over tech
  and consumer discretionary stocks.
• Morgan Stanley also thinks a bear-market correction
  could arrive in 2019, sooner than markets expect.

The Morgan Stanley equities team now thinks a “tipping point” has
been reached in the investment cycle for US stocks.

And as a result, it says the relative advantage of growth stocks
compared with value stocks — a dynamic in play for the past 10
years — could be coming to an end.

That’s a significant shift because growth stocks have been a
crucial driving force behind the continued strength of that
9-1/2-year bull market. Attractive because of their high
potential for future returns, growth names like Facebook,
Amazon,
Netflix,
and Alphabet
have been downright dominant.

The fact that these stocks are starting to falter is a glaring
late-cycle signal for Morgan Stanley, which sees a rotation into
unloved names playing out.

The firm surmises that value stocks — or those seen trading at a
low price relative to earnings fundamentals — are set for a
comeback against their high-growth peers.

Morgan Stanley’s thesis is tied back to last week’s spike in US
bond yields, which has given rise to a broad sell-off across
global stock markets. The analysts expect those bond yields to
rise further as the Federal Reserve sticks to its
interest-rate-hiking path.

The resulting moves will bring “end-of-cycle risks into focus”
while also “capping equity market valuations,” Morgan Stanley
said.

This is a potentially disastrous situation, considering
the US economy is running hot after years of monetary
stimulus and a boost from the Trump administration’s tax cuts. As
rates rise and yields climb, that economic growth will be slowed
and serious pressure will be placed on the future earnings of
market leaders.

And since Morgan Stanley says yields still have further to spike,
this dynamic is likely to get more perilous as time progresses.

The chart below shows just how appealing value stocks have become
compared to their growth peers this year. Morgan Stanley expects
the laggards to catch up.

Morgan
Stanley

“The good news is that tech has started to correct in the past
month, leaving discretionary and health care as the real outliers
now,” the equities team said.

And that trend is likely to consolidate as more fund managers
rebalance their portfolios away from growth sectors.

“We suspect other asset allocators who have remained overweight
US growth equities may now be forced to consider making a
switch,” the firm said.

By sector, the analysts now favor energy, utilities, and
financials over tech and discretionary stocks.

Utilities, which offer a steady return similar to bonds, may look
like an odd choice in an era of rising rates, but Morgan Stanley
said more defensive stocks might prove their worth once the US
economy starts to slow — and that could happen faster than
markets expect.

It said US growth was likely to be interrupted by a cyclical bear
market as soon as next year, once the boost from President Donald
Trump’s tax cuts wears off.

“Our concern lies with the fact that 2019 consensus forecasts do
not anticipate such a dynamic at all,” the analysts said.

As a result, the analysts are more skeptical than the broader
market and expect the S&P 500 to remain range-bound between
2,400 and 3,000 for the rest of this year.

Morgan
Stanley