Morgan Stanley WM shares tips: How to succeed in the stock market

Making money in the financial world seems easy, but the truth is that most investors, around 80%, fail when it comes to dealing with the stock market.

According to Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, in 2023, investors were cautious about moderate inflation and a possible drop in interest rates, as well as fears of a recession in the economy and falling corporate profits.

However, these predictions have not materialised. Consumer savings and aggressive fiscal spending helped the U.S. economy show more strength. Despite tightening monetary policy by the Federal Reserve and other central banks, the S&P 500 Index soared 25% last year, mostly driven by large technology stocks.

This expert, who has had a great year, thinks Wall Street valuations are too high, buoyed by the possibility of a smooth economic recovery and high expectations of interest rate cuts from the Federal Reserve and the European Central Bank. But this expert says investors have little margin for error when their expectations are so high.

Morgan Stanley's Global Investment Committee says investors should take a more cautious approach and that 2024 is likely to be an average year for markets rather than another double-digit winner because of the following risks.

Higher volumes

Morgan Stanley WM calculates that the current forward price/earnings ratio of the S&P 500 is about 20 times higher than it was at this time last year. Meanwhile, the equity risk premium - that is, the reward an investor can expect by owning stocks rather than risk-free Treasuries - is at an extremely low level, about 1 percentage point.

Forecasting returns one or two years out is often accurate, although stock valuations can give investors a limited idea of what returns can be expected in the short term. Current valuation levels point to low annualised stock returns, with returns averaging 4% compared with the long-term average of 7%-8%, experts say.

Corporate earnings are vulnerable

The outlook for corporate earnings is risky. The current estimate for U.S. corporate earnings in 2024 is 242 dollar per share, assuming companies continue to expand their profit margins.

The consensus forecast is overly optimistic given the likely slowdown in US economic growth from last year's blistering 7% to 4% this year. Morgan Stanley WM notes that such a slowdown is likely to result in a loss of sales volume and pricing power for companies.

Overly optimistic rate expectations

According to the company, the market continues to believe that the Federal Reserve will cut rates faster and more sharply than it has publicly stated. Futures markets are predicting more than six rate cuts despite the Fed saying it intends to cut rates three times this year.

Your analysts note that this scenario assumes the central bank will continue to control inflation, while we believe labour-intensive services inflation is likely to persist.

Nominalisation of monetary conditions

On the other hand, they argue that the Fed's monetary tightening has not led to excessively tight financial conditions due to excessive savings and fiscal impulse, so liquidity in the financial system remains high.

However, they expect the loosening of financial conditions to reverse in 2024 as the Fed ends its emergency bank lending programme by 2023 and reverse repo balances shrink, helping to keep cash circulating in the system.

How I might invest in 2024

Based on this analysis, Morgan Stanley makes a few recommendations for 2024. He recommends adding exposure to US stocks other than the largest on the market, known as the "Magnificent Seven", or investing in a market-cap-weighted version of the same stocks. He advises favouring value stocks over growth stocks. He cites financial, industrial, utility, consumer and health care stocks as examples, especially until we see the first Fed rate cut.