Investors may be making flawed assumptions about the path of inflation, monetary policy and corporate earnings. Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley, analyzes what that could mean for markets going forward.

Inflation will soon start to cool

“We shouldn’t write off the potential for persistent inflation. Rents are still growing, and inflation in services businesses, especially linked to travel, is significant. Also, the intensification of the Russia-Ukraine conflict leaves little room for relief in rising energy, metals and food prices, while the renewed COVID-related shutdowns in China are re-igniting supply chain-related price squeezes.” 

Earnings growth will continue to be strong

“We believe earnings pressures continue to grow and current profit-margin expectations may be overly optimistic. Costs continue to rise, and inventories are now outpacing new orders. The inflationary environment may be eroding consumer purchasing power, particularly for lower-income households. The strength of the US dollar also creates headwinds for exporters and pressures the value of the income earned from international markets.”

US stocks must be the best place to invest

“Valuations are rich today at a time when growth is decelerating and policy is tightening. Markets elsewhere may provide more attractive relative value. In regions such as China, equities trade at trough valuations against recessionary conditions. As for emerging markets, headwinds from commodities inflation may ease, while expectations are modest and currencies may strengthen as well. In Europe, a more dovish central bank, combined with possibly more coherent fiscal policy responses in the wake of the military conflict, could support a recovery.”