Morgan Stanley to Citigroup turn sour on US equity outlook

Investment banks from Morgan Stanley to Citigroup Inc. and Credit Suisse Group AG are cautioning investors about the U.S. equity outlook.

Morgan Stanley slashed U.S. equities to underweight and global stocks to equal-weight on Tuesday, citing “outsized risk” to growth through October. Rising cases of the delta virus strain, and tension between elevated inflation expectations and low yields are at play during a time “that has historically poor seasonality,” strategists including Andrew Sheets wrote in a note.

 

Sheets’ downgrade came the same day as Citigroup said any minor correction is at risk of being amplified given the extent of bullish positions. And on Wednesday, Credit Suisse said it maintains a small underweight on U.S. equities due to reasons such as extreme valuations and regulatory risk.

The investment banks’ caution comes after the S&P 500 Index outperformed global equities this year to make new records. That’s even as virus infections start rising again in many parts of the world, and as the Federal Reserve edges closer to setting a path toward tapering stimulus.

Morgan Stanley said it prefers stocks in Europe and Japan in its global allocation. Credit Suisse strategist Andrew Garthwaite wrote in a note that his firm is overweight on Europe and has upgraded emerging markets excluding China to the same status.