Optimistic investors are sending US stocks higher, but they should be wary of moves that “fight the Fed,” Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley reports.

The economic outlook is blurry

“Some investors expect the economic recovery in China to rescue the US. economy from steeper decline, but if US growth rebounds, that could put upward pressure back on prices and prompt the Fed to keep rates higher for longer, in turn weighing on asset prices.”

Corporate profits remain vulnerable

“For the past 10 quarters, US nominal GDP has run between 9% and 14%, versus the long-run trend of 4-5%, and S&P 500 operating margins have averaged 14.5-16.5%, versus the 25-year average of 12.5%. The tendency for performance to revert to a long-term average could bring about a negative year-over-year change in earnings growth, known as a ‘profits recession’.”  

Strength in the labor market persists

“A resilient jobs market could help the economy achieve a ‘soft landing’ if robust real wages support consumption. The conundrum, however, is that strong wages and spending would likely add to inflationary pressures and thus provide little rationale or incentive for the Fed to cut rates.”