LIVE MARKETS-S&P 500 correction close to ending - Morgan Stanley

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S&P 500 CORRECTION CLOSE TO ENDING - MORGAN STANLEY

There is growing evidence that the correction in the S&P 500 .SPX index is nearing its final stages, Morgan Stanley strategists said in a note, as market valuations have compressed to levels seen in previous growth scares.

The Wall Street brokerage takes into consideration the following factors for its view - valuations, rates and key differences between the current environment and past periods when an oil spike has ended the business cycle.

• Valuations

"The S&P's forward P/E ratio has now compressed by 17%, which is in the range of prior growth scare outcomes in the absence of a recession or the Fed hiking," notes Morgan Stanley.

With over 50% of Russell 3000 .RUA companies down at least 20% from 52-week highs, the brokerage points out that "damage under the surface has been significant already."

"The regression between earnings growth and crude when the two are negatively correlated implies that the market is priced for the move in oil prices thus far," they added.

Morgan Stanley maintained its 7,800 S&P 500 target for the S&P 500, assuming recession is avoided, but said the key risk to its forecast is that it could take longer to reach that level if oil prices remain elevated.

SPX has fallen about 7.4% since the conflict began.

• Oil spike - past vs prior

U.S. earnings growth is accelerating and positive currently, whereas it was decelerating and negative in previous oil shocks.

Also, oil price moves in year-over-year terms is still about half of what it was in historical periods, the brokerage said.

"The market is saying the cumulative probability of the paths to resuming tanker flow in the Strait are much higher than the recession probability, and we agree," the brokerage added.

• Rates

Morgan Stanley also notes that rate sensitivity for equities is close to the highs of the past several years, as the U.S. 10-year yield US10YT=RR approaches the key 4.50% level, and bond volatility has increased.

"Whether the move in yields today is being driven by inflation considerations/a more hawkish Fed or by deficit considerations from the war or both, we think it's an important risk variable to consider," they added.

(Akriti Shah)

EARLIER ON LIVE MARKETS:

ENERGY AND RENEWABLES SUPPORT THE STOXX CLICK HERE

BEFORE THE BELL: EUROPEAN FUTURES SOFT; INWIT, ALUMINIUM STOCKS WATCHED CLICK HERE

IT'S A SAD STRAIT OF AFFAIRS AS OIL SOARS CLICK HERE