- Andrew Sheets, chief cross-asset strategist at Morgan Stanley, says the recent correction was just an "appetizer, not the main course."
- Earlier this month, stocks closed about 10 percent below the record highs set Jan. 26.
- "Things get trickier" after the first quarter, Sheets says.
- "Past March, markets will need to digest rising … core inflation and declining PMIs, economic surprises and (quite possibly) earnings revisions."
The market correction experienced earlier this month was just a prelude of what's to come later in 2018, a Morgan Stanley strategist says.
Andrew Sheets, chief cross-asset strategist at Morgan Stanley, said in a note Monday that those declines were just an "appetizer, not the main course."
"Our cycle models suggest that [developed markets] remain in the late stages of a late-cycle environment," said Sheets. "Rising equities, rising inflation, tightening policy, higher commodity prices and higher volatility are (in our view) a pretty normal pattern if that view is correct."
The benchmark 10-year U.S. note yield rose to a four-year high last week, while the short-term two-year yield reached its highest level since 2008 on Tuesday. Fears of rising inflation, along with worries about tighter monetary policy from the Federal Reserve, lifted rates and pressured stocks during the correction.
Last week, the Labor Department said the U.S. consumer price index — a widely followed inflation metric — rose 0.5 percent last month, topping a Reuters estimate of 0.3 percent.
"At present, the strength of current data … is still acting as a counterweight to inflation concerns, as is a strong 1Q results season. Earnings reported so far have beaten estimates by [about] 5% in the US," said Sheets. "Things get trickier, however, after 1Q. Past March, markets will need to digest rising … core inflation and declining [purchase manager indexes], economic surprises and (quite possibly) earnings revisions."
— CNBC's Pippa Stevens contributed to this report.