Morgan Stanley sees stocks topping-out in 2018

Stocks around the world will probably top-out this year, and sooner than most observers think, Morgan Stanley said.

In a research note sent to clients, the bank's strategists said there was "too much comfort in the lack of recession risk".

That was not to say that shares were set for falls like those seen in 2000 and 2008, they emphasised.

Instead, they anticipated a "shallower, choppier decline", as the expansion in the so-called G-4 economies plus China decelerated over the rest of the year, even as inflation picked-up.

"This would be consistent with the historical pattern of cyclical bear markets within a secular bull market, and also our global economic view," they added.

"[after] nine years of financial markets generally outperforming the global economy as financial conditions eased, the next phase will be the other way around," Morgan Stanley said.

So what to do now?

For equities and fixed income, respectively, they pointed to the 2,950 point mark for the S&P 500 and the 2.75% level on the yield for the benchmark 10-year US Treasury note as potentially useful signposts for investors when trying to time increases in the liquidity of their asset portfolios.

More specifically, just as higher volatility in rates and foreign exchange markets was feeding into stock prices and credit spreads were now widening, they strategists were now looking out for three more 'bearish' signals: falling incremental operating margins, more dispersion in analysts' estimates for company earnings and more defensive market leadership.