Morgan Stanley downgraded U.S. stocks: here’s why

Morgan Stanley (NYSE: MS) sees a bumpy road ahead for the U.S. equities.

On Tuesday, the investment bank’s chief cross-asset strategist, Andrew Sheets, downgraded U.S. stocks to “underweight” citing “outsized risks to growth and policy” over the next two months.

Sheets’ remarks on CNBC’s “The Exchange”

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On CNBC’s “The Exchange”, Sheets reiterated that there were real risks to the growth outlook in the upcoming months.

“We do think the August data for the U.S. will be very weak, which could worry the markets. You have a market that is near the highs, has not derated like a lot of the other equity markets year-to-date, and is stuck a little bit between the rate picture and the growth picture,” he said.

According to Sheets, valuations “usually” come down after the initial growth surge, which hasn’t happened for the S&P 500 so far in 2021.

“The fact that you haven’t had that usual adjustment makes us worry that it might still be yet to come.”

Gold could take a hit

On top of that, the Morgan Stanley analyst sees improvement in unemployment and inflation as strong enough reasons for the U.S. Federal Reserve to not delay tapering, which could be a “difficult backdrop” for gold.

“Higher yields and a stronger U.S. dollar, which we expect, are not great for gold. If you look back to the last taper in 2013/2014, gold did very poorly,” he added.

On the contrary, Sheets is ‘overweight’ on Brazil, which he sees as an attractive market as valuations in this market have adjusted significantly (down roughly 50% in PE) this year.