Following strong gains as companies reported good second quarter earnings, analysts at investment bank Morgan Stanley are warning of a correction in the near future. According to the bank, there is little left to drive stock prices higher, leaving the door open for a major selloff in the coming weeks or months.
Morgan Stanley’s team of analysts released a public announcement in which it predicted that tech stocks and small-cap companies would be hit especially hard in the coming selloff. Because of modern portfolio composition, a selloff that was centered around the tech industry could have serious negative implications for retail investors. Significant tech selloffs have already occurred in recent days, as both Facebook and Netflix suffered substantial losses of value after the release of their respective earnings reports. The selloff from Facebook was especially aggressive, with the company experiencing the single largest one-day loss of market capitalization in the history of the stock market by losing nearly $120 billion in value.
The analytical team also noted that large indices have thus far been somewhat protected from the effects of selloffs like that of Facebook by the otherwise generally good performance of their component stocks. That development, however, was actually viewed as a negative by Morgan Stanley, which sees the current strength of indices as providing a “false sense of security in the market” by allowing investors to largely ignore selloffs of individual stocks.
If the prediction by Morgan Stanley proves to be accurate, the S&P 500 index will likely fall by 10 percent or more, the technical threshold of a correction, in the coming months. Such a drop would offset what has otherwise been a relatively strong year for equities in general. The investment bank did, however, also note that it would be possible for money to flow out of tech stocks and into other, less overvalued stocks, thus leaving the index more or less at its current level and confining the losses to the tech and consumer discretionary sectors.