Key Points
- Morgan Stanley is warning of three hidden risks in the current stock market rally. The first risk is a rapidly cooling U.S. labor market.
- The second is uneven corporate earnings, with only a few tech giants driving growth.
- The third risk is mounting inflation, which is being amplified by new tariffs.
- The bank advises investors to hedge their portfolios with real assets, bonds, and international stocks.
The stock market may be hitting record highs, but strategists at Morgan Stanley are warning investors to be cautious. In a new report, they point to three “hidden risks” that suggest it might be time to hedge against a potential downturn instead of chasing more gains.
The first major risk is a cooling labor market. Job growth has slowed sharply, with the latest figures coming in well below expectations. The number of people filing for unemployment has been rising, and hiring rates are at their lowest point in years. This all points to a weaker economy ahead.
Second, while corporate earnings look strong on the surface, the performance is very uneven. The “Magnificent Seven” tech giants are soaring, but the other 493 stocks in the S&P 500 are showing little to no growth. This lack of broad strength is a major concern.
Finally, inflation is heating up again. New U.S. tariffs are expected to push prices higher, and recent inflation data already shows an upward trend. Market-based inflation forecasts are also surging, signaling that price pressures are likely to continue.
Given these risks, Morgan Stanley is recommending that investors look beyond the headline rally. They suggest diversifying into “real assets” like gold and real estate, as well as intermediate-term bonds and international stocks, to provide a cushion against potential market volatility.
