The S&P 500 index rose to 7,650 points on Monday as big technology stocks continued to climb, logging a 1.95% increase from last week’s low. Despite that, Morgan Stanley believes US stocks are exposed to a major decline soon.
### Morgan Stanley warning of a pullback
Mike Wilson, Morgan Stanley’s chief strategist, warns that US stocks may face heavy selling in the coming weeks due to continued rises in energy prices and growing volatility in the bond market.
“Wilson said in a statement:
> «If the correction in valuations turns worse in the near term due to further tightening in financial conditions and/or a marked rise in energy prices, then we believe the S&P 500 index could fall to 7,100 before the uptrend resumes through the end of the year».
In recent weeks, the index has moved sideways and responded only mildly to major recent events, including the US Federal Reserve’s decision to raise interest rates by 0.25%, with hints that rates could be raised again. It also reacted moderately to the earnings season, which saw strong results for most companies—average earnings growth in the second quarter exceeded 50%, driven by technology and energy companies.
### Potential Rebound Catalysts
On the positive side, the performance of US companies has been relatively strong this year, and this trend is expected to continue. According to FactSet, average earnings growth in the third quarter is expected to be 28%, and could exceed 40% if the recent trend holds.
Other drivers include the continued flow of funds from US investors into the stock market. For example, the Vanguard S&P 500 ETF (VOO) collected more than $140 billion this year, and its assets under management rose to more than $1.07 trillion. They could reach $1.5 trillion over the next few years if the trend continues.
There are also signs that the index has become more attractive from a valuation standpoint, as it trades at a forward P/E multiple of 19.1, which is below the five-year average of 19.3.
### Technical Analysis of the S&P 500 Index
Technical indicators suggest that the index is on the verge of a bullish breakout. It has formed a bullish flag pattern consisting of a vertical line and a downward channel, and it is now moving slightly below the upper side of this channel.
Also, the index is stabilizing above the 50-day and 100-day exponential moving averages, which is a positive sign. Therefore, the most likely scenario is continued upward momentum, possibly reaching a new all-time high at 7,820 points.