Be careful: US stock markets could remain nervous, these reasons to weigh on Wall Street

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US equity markets have been weighed down by multiple headwinds over the past few weeks and volatility may continue in the near future. Amid this, Morgan Stanley Chief Investment Officer Lisa Shalett advises investors to tread carefully, seeing at least three areas of uncertainty that could continue to weigh on markets. This year, the S&P 500 is down 16.5%, while the NASDAQ is down 25% and the Dow Jones is down 12%. Lisa Shalett believes that tighter monetary policy, a darkening outlook for corporate earnings and geopolitical concerns will continue to weigh on Wall Street.

Monetary policy tightening: The first reason to be cautious, cited by Lisa Shalett, is the acceleration of the monetary policy tightening movement. “Financial conditions have tightened and current market expectations are for rates to rise another 2 percentage points by the end of the year. As Fed Chairman Jerome Powell acknowledged last week, a ‘soft landing’ for the economy is not guaranteed,” Shalett said while adding that 11 of 14 tightening cycles Fed since 1950 have led to a recession.

The US Federal Reserve raised the interest rate by half a percentage point on Wednesday, pushing the benchmark above 0.75%.

Corporate Earnings Outlook: Although the profits of companies listed in the United States were good in the first quarter of the financial year, Lisa Shalett maintains that these do not accurately reflect the current economic situation and the tightening of monetary policy. Morgan Stanley Wealth’s CIO added that earnings expectations need to be recalibrated as corporate earnings face a number of headwinds, including pressure on margins from rising costs, normalization of demand from the early days of the pandemic, weaker international demand, and the strongest dollar in decades, all of which can hurt U.S. exports and the translation of profits overseas by U.S. businesses.

Geopolitical concerns: Trade, supply chains and commodities are expected to remain disrupted due to geopolitical concerns outside the United States. With no resolution to the Russian-Ukrainian conflict in sight, Shalett says it will create uncertainty for central banks, fuel currency volatility, create headwinds for the Covid-19 recovery and increase pressure on emerging market countries that are already suffering from high costs.

“With high uncertainty, investors need to be disciplined, even though ‘buying the dip’ may seem attractive, and demanding compensation for the risk in the next six months or so,” Lisa Shalett said. She added that investors should remain patient until there is some clarity around inflation, monetary policy, earnings and international events. “Consider taking profits in passive indices and redeploy them to active managers, and look at Treasuries, which we believe are trading closer to fair value.”

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