Morgan Stanley Sees Weaknesses in Stock Rally

Value stocks are showing more life of late, which could signal a pullback, firm says.

The S&P 500 may have hit a record high recently, but Morgan Stanley spies some disturbing trends that make it wonder how long the good times will roll.

For one, according to Michael Wilson, chief US equity strategist at the firm, value stocks are perkier than growth ones lately. For another, there’s a preference for at least some defensive sectors, too.

In this latest iteration of its downbeat views—Morgan Stanley said several weeks ago that a correction is coming that will be at least as bad as last winter’s—Wilson wrote in a research note that storm clouds are gathering.

He cited Federal Reserve interest rate increases, rising cost pressure on companies, and the brewing trade war with China. “The market seems to be (rightly in our view) worried about growth slowing later this year and next.”

Indeed, the spread between defensive and cyclical stocks has dipped in the past few weeks. Some defensive names like telecom (up 4.98% this month) and healthcare (5.45%) are doing well.

But cyclical stocks such as materials (1.45%), industrials (1.91%), and energy (-2.27%) aren’t so much. The picture isn’t that clear-cut, however. Other defensive sectors aren’t so hot: Consumer staples are up just 1.01% and utilities 1.38%.

To be sure, the S&P growth index still outstrips the value index, but thus far this quarter, the gap has narrowed. Growth is up 8.13% while value has gained 5.02%. For the year to date, growth blows away value, 15.2% to 1.45%.

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