The S&P 500, the broadest gauge of US stocks, has been in a bull market since late March 2020 when the Federal Reserve came to the rescue with unprecedented support amid the deep recession caused by Covid-19.
However, the Nasdaq tumbled into a bear market
in early March as oil prices skyrocketed and inflation fears mounted.
Morgan Stanley said investors are buying into the bank's fire-and-ice narrative of an overheating market and economy that get dramatically cooled off. The closing chapter, Morgan Stanley said, is a "fast tightening Fed right into the teeth of a slowdown."
Others are more optimistic about the risks that inflation poses to the stock market and economy.
"Inflation should ease from current levels, and we do not expect a recession from rising interest rates," Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note to clients on Monday.
Indeed, some economists are hopeful that inflation may finally be at or near a peak.
Morgan Stanley shares that view, although the bank doesn't see that as a positive. Instead, Morgan Stanley says easing inflation will be accompanied by slower GDP, sales and earnings growth -- all negatives for stocks.
"While others have been using this as a bullish argument," Morgan Stanley wrote, "we would like to send a clear warning -- be careful what you wish for."