Morgan Stanley: Endnu et bear market rally

“In our view, both the fall in oil and rates are being driven more by the fears of an economic slowdown rather than a real peak in inflation and, therefore, peak Fed hawkishness…we continue to believe any near term rally is nothing more than a bear market bounce with lower lows ahead.

…all of the move last week was due to valuations moving higher which seems unusual given the growing concern about earnings. In fact, even taking into account the fall in 10-year yields, the Equity Risk Premium is back to 300bps. In our view, that makes little sense in the context of the likely negative earnings revisions coming in 2Q and still rising risk of recession over the next 6-12 months. As our fair value valuation framework shows, the S&P 500 is now meaningfully mis-priced again for the current PMI and rates backdrop (even with the recent fall in bond yields).

…The only question is whether we have a soft landing (base case) in which the S&P 500 bottoms near 3400-3500 or we have a recession (bear case) in which the index falls toward 3000.”

(Morgan Stanley Equity strategy)