A rally in stock markets may prove to be short-lived as inflation pressures remain high and a recession seems increasingly likely, according to strategists at Morgan Stanley and Goldman Sachs Group Inc.
While the slump in equities since the beginning of the year reflects investor expectations of a contraction in growth, "I don't think a deep recession is being priced yet," said Peter Oppenheimer, chief global equity strategist at Goldman Sachs.
"It's premature to believe inflation is going to come down quickly or the pressure has eased for the Federal Reserve and other central banks to tighten," he said on Bloomberg TV.
For Morgan Stanley's Michael J. Wilson, the odds of a U.S. recession continue to increase, with the broker's model showing a 36% probability in the next 12 months, while other warnings include rising jobless claims and falling job openings.
"Counter-trend rally may continue, but make no mistake, we don't believe this bear market is over, even if we avoid a recession," he wrote in a note on Monday.
Wall Street's top strategists are urging caution as U.S. and European stock markets rally amid bets that the Fed won't deliver an outsized rate hike at its meeting next week, and as fresh data showed a bigger-than-expected decline in US consumers' long-term inflation expectations.
But Oppenheimer warned that even if the headline inflation figure starts to come down, it's too soon to expect that consumer prices would follow suit quickly.
With the macroeconomic outlook remaining gloomy, investors are turning to the corporate earnings season to see if margins have been resilient to the surge in prices and glum sentiment.
