(Reuters) – The brokerage firm Morgan Stanley warned Monday that high valuations of US stocks could be called into question by investors if aggressive fiscal spending is curtailed following last week’s government debt cut by rating agency Fitch.
MS equity strategist Michael J Wilson noted that massive fiscal stimulus, prompted by the COVID-19 pandemic since its outbreak in 2020, caused the US economy to grow faster than predicted.
This resilience in the face of the US Federal Reserve’s rapid rate hike has led some Wall Street strategists to predict a continued rally for some US stocks.
The S&P 500 has already gained 17.2% year-to-date, thanks to a handful of tech stocks that have pushed the AI outlook high.
While aggressive fiscal spending may continue as the debt ceiling has been raised, fiscal policy has limits as deficits widen — one of the reasons for Fitch’s downgrade.
As bonds – which fund government spending – went on sale last week, there are bound to be repercussions. [US/]
“Investors will question stock valuations, which were already high before the recent interest rate hike,” Wilson said in a weekend note.
“If fiscal spending needs to be curtailed because of higher political or financing costs, the unfinished revenue slump that started last year is more likely to continue.”
(Reporting by Susan Mathew in Bengaluru; editing by Shweta Agarwal)
