Why the rally in stocks is destined to fizzle out, according to Morgan Stanley's wealth CIO
The stock market rally will "stall out," Morgan Stanley's Lisa Shalett said.
The Magnificent 7 stocks will lose momentum amid decelerating growth and dropping cash levels.
Shalett suggested a turn toward beneficiaries of deregulation.
Stocks have rallied sharply since April lows but investors shouldn't treat the upside as a blueprint for what's to come, a top Wall Street exec warned last week.
Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, said she expects slower momentum going forward among key tech stocks. That will jeopardize a sustained rally, she said.
"I think we're going to stall out here. I think it's just hard to justify the numbers," she told Bloomberg TV on Friday, emphasizing that the top S&P 500 leaders are trading back at highs from earlier in the year despite a 6% earnings-per-share drawdown.
Even for those who still believe the Magnificent Seven stocks' outperformance will last, Shalett listed three reasons to reconsider their bullishness.
There's the fact that top-line growth has decelerated, as has free-cash-flow, she said. Typically, Mag Seven stocks don't perform well when the latter declines — the "arms race" to spend on AI has already shrunk free-cash-flow 11%, Shalett outlined.
What's more, investors shouldn't forget the wall of uncertainty that still surrounds artificial intelligence, especially in terms of AI competition. Despite current market euphoria, this year's DeepSeek surprise shouldn't be discounted, showcasing that international AI competition is rising.
"We fundamentally think it was the wake-up call around global engineering, global innovation, and the fact that none of us know how the movie ends here on Gen AI," Shalett said.
Convinced that the AI rally is losing steam, Shalett suggested that investors take profits in tech now and gain exposure to the next beneficiaries: stocks set to rise on industry deregulation. That includes financials, energy, and certain healthcare names.
Shalett's forecast isn't necessarily shared by everyone on Wall Street, with opinions split on what comes next after the recent tariff euphoria. Trade deals have revived investor bullishness, sending the S&P 500 up 19% from April's lowest point.
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