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Morgan Stanley: Stocks Rally to be Thwarted by 16% Earnings Slump

Morgan Stanley has predicted that a 16% earnings slump could hurt the ongoing stocks rally. The equity market has been bullish for quite some time now, but according to the US bank, the earnings decline could be a major obstacle this year.

The bank says that this decline could lead to a 10% pullback in the S&P 500 index, which has been performing well lately. Morgan Stanley has also forecast that the US GDP could contract by more than 2% this year.

The COVID-19 pandemic is the primary cause of this decline in earnings, as it has disrupted business operations across industries and led to a decrease in consumer spending. The pandemic has caused significant uncertainties in the global economy, and companies are struggling to maintain their profitability.

Furthermore, the ongoing trade war between the US and China has also added to the pressure on the global economy, as it has led to a decrease in trade, investment, and industrial activities.

The stocks rally has been driven by the Federal Reserve’s stimulus measures, which have injected trillions of dollars into the economy. This has boosted investor confidence and led to a surge in equity prices.

However, with the US economy already in a recession, the earnings slump is likely to derail the stocks rally. Investors are becoming increasingly cautious about the future of the equity market.

Morgan Stanley warns that the decline in earnings could continue well into 2021, adding that the market’s current valuations are unsustainable. Companies are also likely to face additional headwinds from the upcoming presidential elections and the ongoing Brexit negotiations.

The bank advises investors to adopt a cautious approach when investing in equities, focusing on companies with strong cash flow and balance sheets. They also recommend diversifying portfolios to include fixed income and other assets that offer a defensive stance to balance out the risks.

In conclusion, the stocks rally has been impressive so far, but the earnings slump is a warning sign that investors should heed. The global pandemic has caused significant headwinds that could impact the equity market well into the future. Investors should take a cautious approach when investing in equities and focus on high-quality companies and diversification to balance out risks.

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