Morgan Stanley's Analysis: Fed's Rate Cut Boosts Equities, but Labor Data Key for Next 3-6 Months
In a recent note, Morgan Stanley strategists highlighted the positive response of equities to the Federal Reserve's rate cut. However, they emphasize that labor data will likely drive equity performance in the coming months.
The strategists believe that an upside surprise in the next employment data release is necessary to spark a sustainable cyclical rotation in the U.S. market. They specifically mention the importance of the unemployment rate declining alongside above-consensus payroll gains.
Aside from labor data, Morgan Stanley is monitoring other indicators such as earnings revisions breadth, ISM Manufacturing PMI, and leading economic indicators. They note that these data indicate a later-cycle environment, advising investors to focus on high-quality assets.
The strategists also discuss China's recent stimulus measures, noting that they are unlikely to significantly impact U.S. growth. They highlight that Materials and Industrials stocks may see short-term benefits from the stimulus.
Additionally, Morgan Stanley points out concerns over the August budget deficit exceeding forecasts and the resulting impact on fiscal sustainability. They caution that a drop in inflation could raise questions about the long-term sustainability of deficits.
Overall, high-quality assets have outperformed in this environment, while lower-quality assets have underperformed. To see a reversal in these trends, either private sector growth must reaccelerate or a recession could reset prices.
In conclusion, Morgan Stanley suggests that the Fed's rate cut could stabilize lower-quality cyclical stocks in the short term. However, for these trends to continue, labor data and growth indicators must improve, supporting a soft landing scenario with growth reaccelerating and the Fed continuing to cut rates.