JPMorgan vs. Morgan Stanley: Who's right on stocks outlook?

Investors betting on further US equity gains over the coming months will be disappointed, according to strategists at JPMorgan Chase & Co. Their peers at Morgan Stanley disagree.

The diverging outlooks signal rising uncertainty about whether the record-rally in stocks can continue after the S&P 500 posted gains in six of the past seven months, despite interest rates prevailing at a decades-high level. Equities have run so hard that strategists have been unable to keep up their forecasts, with benchmarks recovering from every pullback since October.

“We see the market upside capped during summer due to the inconsistency between the consensus call for disinflation, and at the same time, the belief in no landing and in earnings acceleration,” a JPMorgan team of strategists led by Mislav Matejka wrote in a note to clients.

Meanwhile, Morgan Stanley’s Michael Wilson says his bull case is in play, for now. Rising government debt will continue to fuel spending and inflate asset prices in the short-term — including equities — as long as the bond market doesn’t signal any tension.

JPMorgan’s strategists are now Wall Street’s most prominent bear after Morgan Stanley’s Wilson capitulated on his negative outlook. Matejka’s colleague, Marko Kolanovic has acknowledged their pessimistic view has hurt JPMorgan’s model portfolio allocation.

The S&P 500’s late rally on Friday, when the gauge held its 50-day moving average, is a positive signal, according to Wilson. 

“Given the bounce, the benefit of the doubt must go to the bulls in the short term, but we would not be surprised if this mood shifts back and forth in June as the data is likely to remain mixed,” he said.

Still, Wilson’s team advises against chasing short-term gains in so-called low quality stocks with poor fundamentals. He’s skeptical about a full-on rotation from tech stocks into those companies, as well as consumer cyclicals and small caps, arguing that bigger firtms offer more compelling risk-reward prospects over the next few months.

Still, JPMorgan’s Matejka sees a small-cap rebound in the second half, but more so in Europe than the US. 

“Drivers are the expected start of policy cuts in Europe, and a likely better domestic activity momentum,” he said. “We think that for the US these catalysts are not as clear.”