U.S. equity markets are hitting record highs, but Morgan Stanley warns of three hidden risks that suggest investors should consider hedging instead of chasing more gains.
"We see more mixed signals in the data...and believe many investors may be overlooking risks posed by a cooling labor market, mixed corporate earnings and mounting price pressures," Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management said in an online note.
Labor Market Momentum Slows Sharply
The labor market is losing steam. July’s non-farm payroll figures came in well below Wall Street forecasts, with just 35,000 new jobs created on a three-month average. This contrasts with the 150,000 monthly pace seen earlier in the year. Continuing jobless claims have risen since April and hiring rates are at their lowest since 2020, underscoring a cooling jobs environment.
Corporate Earnings Mask Uneven Performance
Headline earnings growth masks cracks underneath. While 80% of companies beat consensus estimates and the “Magnificent Seven” tech giants soar with 26% annual growth, the remaining 493 S&P 500 stocks show little or no gains. Sector performance is uneven, too. While information technology, communication services, and financials boast double-digit increases, the rest trail significantly, raising concerns about the breadth of earnings strength.
Inflation Pressures Are Mounting
Tariffs are set to amplify inflation, not ease it. The universal 10% tariff increase is just the beginning, with the White House recently proposing hikes that would nearly double rates to 18%. Core consumer price inflation, meanwhile, hit an annualized 2.9% in June, up from 2.8% in May. Market-based inflation forecasts have surged back to levels last seen during a market scare earlier this year, signaling renewed price pressures ahead.
Real Assets, Intermediate-Duration Bonds May Offer Cushion
Morgan Stanley recommends investors look beyond the headline rally. Adding exposure to real assets such as gold, REITs, and energy infrastructure could offer a buffer. They also suggest intermediate-duration investment-grade bonds, international equities including emerging markets, and alternative plays such as hedge funds and private secondaries to diversify risk and weather volatility.
Source :
https://www.investing.com/news/stock-market-news/these-three-hidden-risks-threaten-the-record-bull-run-in-us-stocks-morgan-stanley-4190212
