Morgan Stanley Sees Fed as Greater Threat to Stocks Than Omicron

Stock investors probably have more important things to worry about than the emergence of the new coronavirus strain, according to Morgan Stanley’s strategists.

While “not that concerned about omicron as a major risk factor for equities,” the strategists led by Michael Wilson see headwinds building elsewhere, after Federal Reserve Chairman Jerome Powell signaled the possible accelerated tapering of asset purchases.

“Tapering is tightening for the markets and it will lead to lower valuations like it always does at this stage of any recovery,” the strategists wrote in a note to clients.

Brian Nick of Nuveen, the investment arm of TIAA, with $1.3 trillion in assets under management, also said Monday that “the major risk to our outlook remains a sudden tightening of financial conditions if central banks are forced to respond to inflation driven by an overly tight labor market.”

In contrast, most of the economic and market risks associated with the virus “are behind,” according to Nuveen’s outlook for 2022.

Other strategists, including those at JPMorgan Chase & Co., have also singled out a hawkish turn by central banks, and not Covid-19, as the main risk to their outlook for stocks.

But while JPMorgan reiterated on Monday that its base-case scenario is for the equities rally to continue into next year, Morgan Stanley sees the S&P 500 trending lower, and valuations declining.