More hawkish Fed could hurt stocks this week – Morgan Stanley

Morgan Stanley analysts believe the market underestimates the risk associated with this week’s FOMC meeting.

The Federal Reserve policymakers are due to get together tomorrow for a two-day meeting. The market anticipates will hike by 25 basis points on Wednesday.

The analysts argue that investor conversations prompted them to think that the market is less focused on the upcoming Fed meeting as a potential risk event for equities.

“We believe that equities are priced for an optimistic policy outcome (rate cuts in ’23 without the growth downside). If the message delivered at this meeting is more hawkish, it could provide a near-term negative surprise for equities,” they wrote in a note.

They also attributed the recent strength in equity to improving earnings revision breadth.

“The driving force behind the resiliency in earnings revisions breadth is the expectation that an upward inflection in 2H ’23and ’24 EPS growth will come to fruition. It’s also rooted in the view that companies broadly have already right-sized expenses and that margin expansion can now take hold. We respectfully disagree with that assertion as it runs counter to our earnings models and our negative operating leverage thesis,” the analysts added.