The last two months’ recovery has sent the S&P 500 Index up about 15% from its June low. As enticing as this rally has been, however, Morgan Stanley’s Global Investment Committee remains convinced that it is still no more than a bear-market rally.

It’s not unusual for stocks to rally during a bear market

“Rallies have occurred in just about every bear market of the past 95 years, with gains averaging 18% before a downward slide resumes. In comparison, the current rally has gained about 15% so far. That may seem like a bull market that is gathering steam, but given the historical context, we may not be out of the woods yet.”  

Bond and currency markets anticipate further rate hikes

“While stock investors continue to hope that the Fed will soon reverse its rate-hike program, Fed fund futures imply that the central bank will continue to raise rates for longer. Global currency markets appear to agree, with the US dollar still close to the 20-year high it reached recently.”

Stocks look expensive

“Valuations have re-inflated, with the market’s forward price/earnings ratio now at 18.7. Meanwhile, the equity risk premium is around 2.6 percentage points. That’s about one whole point lower than the 13-year average. Such valuation concerns wouldn’t be so troubling if it weren’t for the fact that current pricing seems based on unrealistic earnings estimates. While US consumers are still spending and the labor market remains strong, leading economic indicators suggest a slowing in growth that may challenge profit estimates.”