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AS THE MARKET CLIMBS A WALL OF WORRY, PICK YOUR SPOTS TO REACH NEW HEIGHTS

Technical momentum, quiescent implied volatility and improved financial conditions have underpinned the recent equity market rally.

Lisa Shalett, chief investment officer of Morgan Stanley $(MS)$ Wealth Management, believes investor skepticism is still elevated, but the market climbing a “wall of worry” may be the near-term path of least resistance.

"We also acknowledge that the outline of a new bull case based on a 2026 capex spending boom is emerging," she writes in a note out on Monday from the MS Global Investment Committee $(GIC)$.

Still, MS perceives almost no clarity on final tariff and trade terms, while at the same time Shalett believes that geopolitical risks remain insufficiently priced in, amid rising labor market uncertainty.

"As risk managers first, we are hedging over the summer, with a focus on reliable dividends and cash flow. Watch policy developments around tariffs, taxes and deregulation for indications of 'certainty,'" she writes.

Shalett would consider increasing active stock picking, as the passive index undergoes compositional rotation, with the Mag 7 no longer acting as a correlated block.

She says to use opportunities to rebalance and position for potential 5%–10% U.S. equity returns amid increased volatility, higher real rates and a weaker U.S. dollar.

Along with this, Shalett would diversify with positions in international equities, commodities and hedge funds.

Energy/energy infrastructure is MS' most preferred tactical long recommendation.

She also says that "overweighting short-to-neutral-duration investment grade and municipal bonds still makes sense."

(Terence Gabriel)

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