Reality check for markets

Morgan Stanley and BlackRock analysts are sounding the alarm that equity valuations and market fundamentals aren't in line with one another.

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1. The stock market is "disconnected" from reality. At least that's what Morgan Stanley's Mike Wilson thinks. 

In a Monday note to clients, analysts led by Wilson said valuations in equities don't resemble the current economic and earnings landscape.

In other words: Stocks have room to fall and the bear market is not yet over.

Markets are getting ahead of themselves as they've priced in an extended pause in Fed rate hikes after July's 8.5% CPI reading. But to Wilson, that reading hasn't eased fast enough — so it's unlikely to justify a dovish pivot by the central bank.

"That development leaves equity multiples significantly disconnected from fundamentals which continue to suggest we're in a late cycle, slowing growth environment."

Similarly, BlackRock analysts said the current rally isn't here to stay, as deteriorating earnings and a still-aggressive Fed will keep pressure on stocks.

While the S&P 500 has jumped about 18% from its June lows and the Nasdaq is riding a 20% bump, the asset manager said investors shouldn't hold their breath for more upside. 

"We're not chasing the rally," BlackRock said. "Why? First, market expectations for a dovish [Fed] pivot are premature. We think a pivot will come later as the Fed is for now responding to pressure to tame inflation. Second, we see the market's views on earnings as overly optimistic."

You can listen to me chat more on this in today's episode of The Refresh from Insider.

In other news:

2. These top-rated stocks can beat the market even as inflation erodes corporate profit margins. Morgan Stanley investment chief Mike Wilson said as high prices begin to slip in the coming months, earnings will stumble too — but these 9 names can weather the tumult. 

3. This 23-year-old entrepreneur netted over $750,000 in 2021 by renting out properties he doesn't own. After Derek Cheung learned about rental arbitrage in 2019, he leased his first two apartments and listed them on Airbnb. He broke down how he got started and what he looks for in the market. 

4. Stocks could be set for a sustained rally for the rest of the year as they've climbed 15% since mid-June. Not all analysts think stocks have room to fall, with inflation appearing to have peaked, it's possible that there's a new bull market ahead — here are 7 reasons why. 

5. Bed Bath & Beyond surged 10% as traders pumped up the shares of the retailer. The weeks-long rally continued Monday as the stock was the most-mentioned name on the Wall Street Bets Reddit page. Here's what you want to know.

What about you? If you were watching markets in the early 1990s, how does the landscape feel today versus then? What do you remember? Let us know in the comments.

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This newsletter was curated by Phil Rosen. Thoughts or questions? Sound off in the comments section below.