The US stock market is defying expectations and eyeing a “no landing” scenario for the economy, according to a recent report from Morgan Stanley. This scenario would see high economic growth and sticky inflation, a departure from the previously anticipated soft landing.
Investors have shifted away from the soft landing view in light of positive economic data, including a drop in unemployment to 3.8% and strong readings in the ISM manufacturing index. The stock market is beginning to embrace the idea of no landing at all for the US economy, with recent growth data exceeding expectations and inflation remaining higher than anticipated.
Morgan Stanley’s Michael Wilson highlighted the outperformance of cyclical sectors like energy and materials as evidence that the equity market is processing a better growth environment. This shift in leadership from tech-heavy sectors to cyclically sensitive stocks suggests a broader market outlook.
While the market has been reacting to macroeconomic developments, the strategists emphasized the importance of the 10-year US Treasury yield as an indicator of market sensitivity. Small caps and low-quality stocks are more responsive to rate changes compared to large caps, but quality equities are expected to outperform on a relative basis.
As the market continues to navigate uncertainty, investors are advised to maintain a balance of quality and cyclical factors in their portfolios. The roller coaster ride of the equity market reflects the ongoing debate between a soft or hard landing, but for now, the no landing scenario seems to be gaining traction.
