Two factors to fuel a near-term correction in US stock indices – Morgan Stanley

Major US stock indices charged higher in August, regularly setting new highs. Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley, explains why two critical factors could serve as catalysts for a near-term pullback in stock indices.

Outlook for Real Rates

“We see real rates rising. As global economies recover foreign investors, who have flocked to Treasuries as a ‘safe haven’, could be encouraged to move their money elsewhere. Higher rates also could pressure stocks’ price-to-earnings multiples, which currently sit well above historic norms.”

Profit Headwinds

“Corporate earnings may not be as robust going forward. We are concerned about the sustainability of operating margins, given the headwinds to corporate profitability: higher taxes, more aggressive regulation, higher input costs, higher cost of labor and a weaker US dollar.”