MW This Morgan Stanley investor warns of three big disconnects with stocks on the verge of a bull market

By Barbara Kollmeyer

Treasury bonds, dollar and gold seem mismatched versus stock-market boom

Hip, hip, hurrah? After shaking off a Moody's downgrade, the S&P 500 SPX finished Monday 19.68% above its April closing low, just inches from reaching the 20% level that traditionally marks a bull market.

Also notable for Monday was JPMorgan CEO Jamie Dimon, who came out swinging against an "extraordinary amount of complacency" right now in these V-shaped markets.

Our call of the day adds another voice to the complacency worries. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, warns equity investors are ignoring three big market disconnects that might come back to bite them.

Shalett sees "unequivocal confidence" among investors that the U.S.-China tariff pause hammered out just over a week has put a permanent lid on trade war uncertainty, which has brought stocks back to where they were on Jan. 1.

"Such a round-trip amid still-deteriorating earnings estimates suggests ever richer forward valuation multiples than at the start of the year," she wrote in a note. That is, investors are now being prepared to pay a lot more for the multiple of next year's earnings per share.

"While we have noted our skepticism regarding the pivot, other asset classes also signal the coast may not be fully clear," she said, diving into signs of potential stock trouble via three major assets.

First up, bonds. "While rising front-end U.S. Treasury yields appear to confirm confidence in economic growth, the 10-year yield's grind toward 4.5% is noteworthy, as wider term premiums and higher real rates indicate a keen focus on U.S debt and the upcoming tax, debt ceiling and budget bills," she said.

Nearly all proposals for those three major bills suggest a ballpark $2 trillion, at least, in added debt, potentially driving interest expenses over the next decade to as much as 50%, said the CIO. "By definition, this means higher rates for longer and lower equity multiples," she said.

Another "profound disconnect" is the dollar, which has seen persistent weakness. Since a Jan. 8 peak, the dollar has dropped 8% versus major currencies, "apparently a victim of flows and global reserve rebalancing."

"How odd that both oil and the dollar are now positively correlated, as opposed to the reverse. If the dollar is entering a new secular regime of relative weakness, as we anticipate, it too could be signaling lower equity multiples, in this case via the capital flows channel," she said. In other words, a weak dollar may spook foreign investors out of U.S. stocks.

Finally, gold is another blind spot, said Shalett. Historically, secular equity bull markets has seen stocks outpace gold, but since 2022, the commodity has outpaced U.S. equities. "Strength in gold, disconnected from its role as a 'safe haven,' indicates likely shifts in central bank foreign reserve diversification, another reminder that risk premiums in other asset classes may not be providing much shelter from potential storms," she said.

Shalett warned that investors hoping for a resumption of the 2023-2024 "Goldilocks environment" - when U.S. stocks saw support from falling real rates and inflation-resistant dollar strength - could be disappointed.

"Consider using risk-asset repricing to rebalance and position for potential 5%-10% average U.S. equity returns amid increased structural volatility, higher real rates and US dollar weakness. This is not the time to count on valuation expansion," she said.

The CIO suggests adding "diversifying positions" in international stocks, commodities, energy infrastructure and hedge funds, along with overweight or bullish exposure to short-to-neutral duration investment grade and municipal bonds.

The markets

A six-day win streak for the S&P 500 is on the line, with U.S. stock futures (YM00) (ES00) (NQ00) mixed, Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD30Y steady and the dollar DXY drifting south.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              5963.6     2.04%   15.61%  1.39%    12.35% 
   Nasdaq Composite                                                     19,215.46  2.71%   21.07%  -0.49%   14.41% 
   10-year Treasury                                                     4.452      -2.10   5.20    -12.40   3.10 
   Gold                                                                 3217.3     -0.76%  -6.34%  21.90%   32.38% 
   Oil                                                                  61.98      0.03%   -1.13%  -13.76%  -21.76% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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CATL, which supplies batteries to Tesla $(TSLA)$, did not disappoint at the world's largest IPO this year, a $4.6 billion Hong Kong debut that mostly barred Americans.

China and Australia each cut key lending rates to ease stress on economies amid trade tensions.

Two weeks after Democrats blocked that legislation, the Senate voted to move forward with plans to regulate stablecoins.

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The chart

Wells Fargo Investment Institute is pushing back against some renewed enthusiasm over emerging market stocks - Bank of America and JPMorgan more recently -as the MSCI Emerging Markets Index has gained 8.5% in 2025 versus 1.4% for the S&P 500. Investment strategy analyst Austin Pickle's chart offers an "uninspiring" long-term track record for emerging-market stocks. "EM earnings have barely budged since 2007, and index levels remain roughly 15% below their pre-global financial crisis highs," against "impressive earnings growth and returns over the same period" from the S&P 500, he wrote. Emerging markets have also seen nearly triple the number of bear markets since 2007, he said.

Top tickers

These were the most active tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   UNH     UnitedHealth 
   PLTR    Palantir Technologies 
   AAPL    Apple 
   AMD     Advanced Micro Devices 
   AMZN    Amazon.com 
   TSM     Taiwan Semiconductor Manufacturing 
   MULN    Mullen Automotive 

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-Barbara Kollmeyer

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May 20, 2025 08:19 ET (12:19 GMT)

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