Morgan Stanley, JPMorgan present stock market views

The stock market has weakened this year, with the S&P 500 up 16% year-to-date and hitting 38 record highs.

But analysts have mixed views on whether the market will continue its rise.

Inflation is also easing, with consumer prices rising 2.9 months in the 12 months to July, the slowest increase since March 2021.

Michael Wilson of Morgan Stanley, one of the stock market’s best strategists.

Bloomberg/Getty Images

Job growth is also slowing, with nonfarm payrolls totaling 114,000 in July, down from the 12-month average of 215,000.

These statistics have experts expecting the Federal Reserve to begin cutting interest rates this month. This would likely boost the economy and therefore boost corporate earnings.

Earnings growth, stock valuations

FactSet compiles a measure of earnings growth that combines the earnings of S&P 500 companies that have already reported second-quarter results with analysts’ forecasts for companies that haven’t.

As of Aug. 16, with 93% of S&P companies reporting, the combined second-quarter earnings growth is 10.9%. If that were the final figure, it would be the highest since the fourth quarter of 2021.

Those strong gains are already supportive of the stock. And analysts are predicting another solid growth of 5.2% in the third quarter.

Related: Goldman Sachs and Vanguard present their latest stock forecasts

But many experts believe the market is overvalued. As of August 16, the forward price-to-earnings ratio for the S&P 500 was 21, easily beating the five-year average of 19.4 and the 10-year average of 17.9.

The stock also notes that the artificial intelligence mania that sent mega-cap tech stocks soaring is starting to wane. Shares of Nvidia, the semiconductor maker that is the ultimate poster child for AI, have fallen 1% over the past three months.

The S&P 500 was down 2% in late afternoon ET on September 3.

Morgan Stanley’s view of the stock

Michael Wilson, chief US equity strategist for Morgan Stanley, says the direction of the market depends on Friday’s August jobs report.

“A stronger-than-expected payrolls number and a lower unemployment rate would likely give markets more confidence that risks (to economic growth) have abated,” he wrote in a commentary.

And that would pave the way for stock valuations to remain high and a potential recovery in other markets/stocks that have lagged. Much of the stock market’s rise this year has been fueled by the big tech stocks: Alphabet, Amazon, Apple, Microsoft and Nvidia.

Related: Morgan Stanley Unveils Top Picks, Including Nvidia

Morgan Stanley economists forecast a above-consensus increase in payrolls of 185,000 for August, up 62% from July. They anticipate a jobless rate of 4.2 percent, down from 4.3 percent in July.

But, “another weak report (like July’s) and another rise in the unemployment rate would likely reignite growth fears and pressure equity valuations like last month,” Wilson said. The S&P 500 fell 8.5% from July 16 to August 5.

For equity investors, Wilson recommends focusing on defensive businesses that prioritize operational efficiency, have sustainable pricing power, or both.

“Consumer Staples Stocks to Our Fresh Money Buy List – Walmart (WMT) Colgate-Palmolive (CL) Coca cola (KO) – encompasses these themes,” he said.

JPMorgan’s stock opinion

Mislav Matejka, chief global equity strategist at JPMorgan Chase, put it a little differently than Wilson. Stocks could sell out even if the Fed cuts rates, he wrote in a comment cited by Bloomberg.

A Fed rate cut would result from slowing economic growth, he said. And that slowdown could be bad for the stock market. September is also the weakest month for stocks historically, he noted.

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“We’re not out of the woods yet,” Matejka said, “sentiment and positioning indicators look far from attractive, political and geopolitical uncertainty is high, and seasonals are more challenging again in September.”

Political uncertainty includes the presidential election. And geopolitical uncertainty includes the wars in Ukraine and the Middle East. Like Wilson, Matejka prefers defensive actions.

The author owns shares of Walmart and Coca-Cola.