Morgan Stanley sees multiple correction triggers for market but not enough to halt the bull run

Morgan Stanley sees two fundamental and two technical risks for the market.

Brokerage firm Morgan Stanley sees several potential triggers for a market correction, but it doesn't view them as significant enough to derail the ongoing bull run. For the brokerage firm, the bull run has only crossed the halfway mark, with a few more miles left to go.

Although the brokerage doesn't expect a correction to hinder the ongoing bull run, it does believe that such a scenario can test those invested in the market and also potentially excite those sitting with cash.

Morgan Stanley also identified two fundamental and two technical downside risks for the market. Fundamentally, the brokerage pointed to a potential growth slowdown, the first since COVID-19, and changes in government spending as major concerns. On the technical side, the shift from the primary market to the secondary market and the possibility of a global sell-off, especially in US equities, are viewed as key risks.

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As for valuations, Morgan Stanley believes that while high valuations alone aren't typically the cause for a market correction, they can act as a catalyst when faced with shifts in fundamentals or market sentiment.

Meanwhile, the brokerage also highlighted that the market discounting worries, largely due to the resilience of retail participants, has left professional investors perplexed. Seeing the increased participation of retail investors, Morgan Stanley also predicts a structural rise in equity holdings on household balancesheets.

As for stock selection, Morgan Stanley prefers to look at cyclicals over defensives and large-caps over small and midcaps. In terms of sectors, the brokerage is overweight on financials, technology, consumer discretionary, and industrials and underweight on others.

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