(Bloomberg) -- Stocks have rallied in the face of worsening earnings and economic expectations, producing “massive disconnects” that threaten market stability, warned Lisa Shalett at Morgan Stanley Wealth Management.
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The chief investment officer flagged a surge in economic-sensitive shares relative to defensive stocks as a sign of the market’s confidence in future growth. Yet indicators of retail sales, manufacturing and business leaders’ confidence have been weakening along with corporate earnings.
The result, Shalett said in a note this week, is that the performance ratio of cyclical versus defensive stocks has never been as out of sync with the leading economic indicators as it is now.
While the mismatch is increasingly framed as a sign that the market is predicting a soft landing for the economy despite the Federal Reserve’s ongoing tightening, Shalett is skeptical. She attributed the latest equity rally to potentially short-term technical factors, such as short sellers buying back stocks to cover bearish positions and the seasonal tendency of investors to flock to the market’s biggest losers from the previous year.
In other words, a technical-driven rally has made the market deviate from the fundamentals.
“I’ve heard the theories that people say, ‘yes, we understand what should happen, but we’re going look through it,’” Shalett said Wednesday on Bloomberg Television. “I don’t know how far their crystal ball goes to look through it, but history...
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