(FinancialPress) — Morgan Stanley believes that the early 2018 drop-off in the U.S. stock market is only a taste of what could come from rising bond yields. The hardest part, they say, is still to come.
Somewhat low real yields were an important support for equity valuations – so a higher break would mean that stocks will have to fall back on earnings instead of on multiple expansion in order to thrive higher – reported Andrew Sheets, head of the London-based financial institution, and his colleagues, in the paper. The real issue there is that Q2 could see the beginning of a slowdown. “It’s when growth softens while inflation is still rising that returns suffer most,” the strategists wrote.
“Strong global growth and a good first-quarter reporting season provided an important offset. We remain on watch for ‘tricky handoff’ in the second quarter, as core inflation rises and activity indicators moderate.”