Morgan Stanley slashed its rating on U.S. equities, anticipating a rocky road into October as the Federal Reserve prepares to dial back easy monetary policy. "We see a bumpy September-October as the final stages of a mid-cycle transition play out," Morgan Stanley chief cross-asset strategist Andrew Sheets said in a note. "The next two months carry an outsized risk to growth, policy and the legislative agenda. We lower U.S. equities to UW and prefer stocks in Europe and Japan." The S & P 500 has rallied about 20% this year without a single 5% pullback. The broad equity benchmark has more than doubled since its pandemic low in March 2020, marking the fastest bull market doubling off a bottom since World War II . The S & P 500's strong run has come even as the Covid-19 delta variant has raised concerns about the path for the economic recovery. Underpinning Morgan Stanley's bearish view is the Fed's potential tapering of monetary stimulus in the face of rising inflation. The risk on the policy front also coincides with the stock market's poor seasonality in September, the bank said. "Since March, cyclical assets have struggled as economic rate-of-change peaked and delta cases surged," Sheets said. "At the same time, inflation (and inflation expectations) have stayed elevated, leading to more tension with low yields and exceptionally easy monetary policy." Fed Chairman Jerome Powell has indicated that the central bank is likely to begin withdrawing some of its easy-money policies before year-end, though he still sees interest rate hikes off in the distance. "These forces are now converging on a period that has historically poor seasonality, a heavy supply calendar and an unusually heavy event calendar," he added. The bank maintained its year-end target for the S & P 500 at 4,000, which represents a roughly 12% decline from Friday's close of 4,535.43. It's among the most bearish views on Wall Street as the average year-end target from the top strategists stands at 4,328, according to the CNBC Market Strategist Survey .
A trader works on the floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., August 20, 2021.
Andrew Kelly | Reuters
Morgan Stanley slashed its rating on U.S. equities, anticipating a rocky road into October as the Federal Reserve prepares to dial back easy monetary policy.