Morgan Stanley Global Recession Fears

Luke Sharrett/Bloomberg

Morgan Stanley cuts S&P 500 target as recession fears rise - Morgan Stanley strategists are growing increasingly concerned about the risk of a global recession, slashing forecasts for all major equity markets and advising investors to sell stocks that have recently rallied.

In a report out on Monday, the bank’s global strategy team cut its 12-month target for the S&P 500 index SPX, -0.13%  to 2,050 from 2,175, indicating the U.S. benchmark over the next year only will rise 1.4% from its close of 2,022.19 on Friday. This comes after the index rallied 8.4% over the past month, driven in part by a rebound in oil prices and upbeat economic data from the U.S.

However, there’s nothing to indicate the rally will continue, neither in the U.S. or elsewhere, according to the Wall Street bank.

“Weaker growth forecasts and rising political risk lead us to close our positive tactical stance and lower exposure in global equities,” the analysts said in the note. “The probability of a global recession has risen.”

Other big bank strategists also have been dialing back their predictions for U.S. stocks.

For 2016, Morgan Stanley now sees the U.S. economy growing by 1.7%, down from a previous forecast of 1.9%. The eurozone is expected to grow by 1.5%, down from 1.8%, while the outlook for emerging-market economies was cut to 4% from 4.4%.

This leaves little good news for investors in the stock market. Apart from dropping its S&P forecast, the bank also cuts it target price for the MSCI Europe index to 1,300 from 1,500 and lowered the MSCI Emerging Markets 891800, +0.32%  outlook to 735 from 850.

“Our economists put the probability of global recession at 30%, the highest of this cycle. While the U.S. remains our favored equity market on the theory that it will command a premium in a low-growth, choppy market, its premium could be at risk if a full-blown recession causes the market to sell anything trading at a premium,” the analysts said.

However, that doesn’t entirely mean there’s no money to be made in the stock market over the next year. It just means that investors have to be more selective in picking the right stocks to weather the growth slowdown. On a regional basis, Morgan Stanley says it prefers the U.S., where utilities, consumer discretionary and financials are expected to be the best bet.

“[The] U.S. offers best defense in equity markets — more reliable growth,” the analysts said.

Stock markets aside, Morgan Stanley also said its adding to its holdings of cash, U.S. Treasurys and Japanese government bonds.