Morgan Stanley's Lisa Shalett: This is not the time to call 'all-clear,' as bond volatility persists

Key Concepts:

• Market recalibration and risk repricing
• Earnings revisions and forward P/E ratios
• Soft landing vs. recession risks
• Bond market volatility and Treasury auctions
• Bond vigilantes and global currency dynamics
• Tariff exposure and sector underperformance
• Fundamental value and pricing power

1. Market Recalibration and Risk Repricing:

• The market has recalibrated and repriced risk, with technicals becoming profoundly oversold.
• Price action shows laggards (e.g., tech, financials) leading in the short term, indicating rational market behavior.

2. Earnings Revisions and Forward P/E Ratios:

• Earnings revisions are negative, with the city earnings revisions index negative for 17 straight weeks.
• Mike Wilson (Morgan Stanley) has revised his earnings estimates: from $270 to $257 for the current year and from $303 to $281 for the next year.
• Blended earnings estimates are around $270, resulting in a forward P/E ratio of over 20 times at current market levels.
• The market is still expensive, suggesting caution despite recent repricing and opportunistic bargains.

3. Economic Outlook: Soft Landing vs. Recession Risks:

• Morgan Stanley's base case is a soft landing, but "barely barely."
• Recession risks are estimated at about 40%, indicating significant volatility.
• The current environment is not an "all clear" signal, especially with elevated bond market volatility.

4. Bond Market Volatility and Treasury Auctions:

• Concerns remain about the bond market, despite recent calming of 30-year swap spreads.
• Upcoming Treasury auctions, particularly in May, are critical for refinancing.
• The ability to refinance in a calm market is a key focus.

5. Bond Vigilantes and Global Currency Dynamics:

• "Bond vigilantes" are closely monitoring global currency market dynamics and news from the US Congress regarding budgets and deficits.
• The US Treasury market is influenced by technicals (e.g., unwind of hedge fund basis trades) and fundamental concerns about the cost of capital for long-duration US Treasuries.
• There are counterparties around the world looking at what is the right level of cost of capital to be carrying or to demand for long duration US treasuries.

6. Tariff Exposure and Sector Underperformance:

• Tariff exposure is a significant risk, impacting sectors like healthcare (pharmaceuticals), semiconductors, and retail.
• Investors cannot count on anything as being permanent.
• The strategy is to focus on companies with strong market positions, high market shares, and pricing power to withstand potential tariffs.

7. Investment Strategy:

• Focus on fundamental value and high-quality names with strong market positions.
• Healthcare sector is attractive for stock picking, complementing the highest conviction area, financials.

8. Notable Quotes:

• "Don't get too far over your skis." - Lisa Shalett, cautioning against excessive optimism.
• "Bond vigilantes are watching very, very closely here." - Lisa Shalett, emphasizing the scrutiny on the bond market.

9. Synthesis/Conclusion:

Despite recent market recalibration and repricing, significant risks remain due to negative earnings revisions, potential economic slowdown, and bond market volatility. Investors should exercise caution, focusing on fundamental value and high-quality companies with pricing power, particularly in sectors like healthcare and financials. The bond market and upcoming Treasury auctions require close monitoring, as "bond vigilantes" are scrutinizing US fiscal policy and global currency dynamics.