Market Momentum Meets Reality Check
The US stock market has been on a tear since Donald Trump’s election win, with indexes hitting fresh highs as investors anticipate the impact of his promised policies on earnings growth. However, beneath the surface, three key risks are lurking, threatening to disrupt the Trump trade.
Bond Yields: A Ticking Time Bomb
Morgan Stanley warns that a significant surge in Treasury bond yields could spook equity investors, potentially derailing the market’s upward momentum. The 10-year note has already jumped 21 basis points to 4.47% since the election, and further increases could stir anxiety among investors. Concerns over the government’s ballooning deficit could drive yields even higher, posing a significant threat to equities.
The Dollar’s Strength: A Double-Edged Sword
The US dollar has surged to its highest level since November 2023, driven by expectations of higher interest rates under Trump. While this may seem like a positive development, Morgan Stanley notes that a strong dollar could spell trouble for large-cap stocks, particularly those with high foreign sales exposure. If the dollar continues to strengthen, it could slow down multinationals’ EPS growth, weighing on the broader market.
Equities: Overpriced and Vulnerable
The S&P 500 has become increasingly disconnected from its fundamentals, with investors piling into market themes tied to artificial intelligence. Morgan Stanley warns that this trend cannot continue indefinitely, and that further upside in multiples is contingent on data confirming a reacceleration in growth. While this doesn’t necessarily signal a bearish turn, it does highlight the need for caution.
A Delicate Balance
Despite these risks, market momentum remains firmly upward, and investors are unlikely to turn bearish without a clear catalyst. However, it’s essential to monitor these risks closely, as a sudden jump in interest rates or inflation could quickly reverse the market’s fortunes. For now, investors are advised to remain vigilant, but not necessarily bearish, as the market navigates this complex landscape.
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