Morgan Stanley expects a 10% slump in European stocks more than the next quarter as numerous unfavorable circumstances converge. The financial investment bank built the forecast partly based mostly on a slowdown in financial momentum and tighter liquidity situations in the fixed-revenue market place. “We count on a 10% correction above the summer time months as progress slows and liquidity deteriorates,” reported Morgan Stanley strategists led by Graham Secker in a take note to customers on June 4. The MSCI Europe Index is up 11% this yr. A correction would choose the market place back to November 2022 stages. The investment financial institution explained defensive stocks were far better suited to navigate this anticipated downturn about cyclical stocks. It recommended retaining “overweight” positions in luxurious items, healthcare technological innovation, semiconductors, and application, while downgrading financials to neutral thanks to macroeconomic headwinds. Bounce back again Nonetheless , the Wall Avenue bank also expects the market place to speedily bounce back again from a downturn. Its new 12-month focus on for the MSCI Europe index is 8% previously mentioned the present levels, which could lead to returns of over 10% when dividends are provided. In addition, Morgan Stanley expects a decline in earnings per share of 6% for 2023, up from a beforehand projected 10% lower, and EPS development of 6% for 2024. LYY5-DE 1Y mountain The expense bank’s strategists warned that even with the resilience of equities so far this calendar year amid gradual growth and tightening financial policy, the setting could convert significantly less supportive in the close to expression. Initially, even as trader sentiment remains reduced, their portfolio positioning continues to be “standard,” which adds downside chance, in accordance to the strategists. They also pointed to worries in the macro information. The ongoing slide in commodity selling prices has bolstered the bank’s economists’ projections for GDP advancement to sluggish materially around the following pair of quarters. Additionally, the lender claimed stocks are expected to grapple with a more robust U.S. dollar, ongoing financial tightening, and diminishing liquidity. Nevertheless, the bank explained the downside chance ought to be minimal. It highlighted that the current cost-to-earnings ratio for the future 12 months stands at a reasonably lower 12.5, which really should curb the summer season correction to all around 10%. — CNBC’s Michael Bloom contributed reporting.