Why Wall Street is warning that stocks are out of touch with real life economics.

·4 min read

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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This is a photo of a US $100 bill with a red arrow pointing downwards in front of it.
This is a photo of a US $100 bill with a red arrow pointing downwards in front of it.

The stock market could continue to tumble in the face of rising inflation and a recession.sefa ozel/Getty Images

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: 

NYSE Trader Dow Jones stock trader
NYSE Trader Dow Jones stock trader

Getty Images North America/Getty Images

2. US stock futures largely dip early Tuesday, as investors eagerly await earnings from some of the world's biggest retailers. Here are the latest market moves.

3. On the docket: Walmart, Home Depot, and Challenger Ltd, all reporting. Plus, look out for the Capacity Utilization data, which is expected to be released by the Federal Reserve later this morning.

4. 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.

5. Russian crude exports to Asia have fallen to their lowest levels since March. India and China have been big importers of supplies, but those figures are beginning to slip. Now, data from Bloomberg shows shipments are dropping below two million barrels per day.

6. The dollar jumped against China's yuan by the most in three months. New economic data from Beijing showed that the world's second largest economy is sputtering. In a surprise move, China slashed interest rates after the country's factories and retail sales slowed in July. 

7. Homebuilder stocks dropped Monday as companies reported the eighth straight month of declining housing sentiment. About one in five homebuilders said they have reduced prices to boost sales or limit cancellations. The mood in the housing market has now hit its lowest point since the start of the pandemic. 

8. 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. 

9. 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.

bed bath beyond stock
bed bath beyond stock

Markets Insider

10. 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.

Keep up with the latest markets news throughout your day by checking out The Refresh from Insider, a dynamic audio news brief from the Insider newsroom. Listen here.

Curated by Phil Rosen in New York. (Feedback or tips? Email prosen@insider.com or tweet @philrosenn). 

Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London. 

Read the original article on Business Insider