Morgan Stanley's wealth management investment director believes that the summer rally has driven various asset classes to historic highs—from US mega-cap stocks and value stocks to meme stocks, all posting significant gains—but now may be the time to take profits.
The strong rally in small and mid-cap companies, including both old and new meme stocks, has been notable. Over the past six months, the Russell 2000 index has gained 15%, outperforming the S&P 500's 13 percentage point advance.
Lisa Shalett, Morgan Stanley's wealth management investment director, is convinced that now is the right time to take profits on US stocks.
This week, Morgan Stanley's Global Investment Committee issued a series of recommendations to investors. The firm's analytical team clearly stated that they believe investors should consider reducing exposure to three specific sectors of US stocks: small and mid-cap stocks, unprofitable technology companies, and popular meme stocks.
Shalett noted that despite the strong momentum in small-cap stocks, investors would be wise to follow the lead of several hedge funds and exit immediately. She believes that while the upward momentum driving the market may continue in the short term, market conditions are likely to deteriorate significantly next year, particularly challenging for small-cap companies.
"We believe small-cap stocks' profitability and public market performance are indeed inferior to private markets," she stated.
Another concern raised by Shalett is that small-cap companies may lack the capability to compete technically with large-scale investments. "They likely cannot invest in generative artificial intelligence and compete like their larger peers," she added.
Although market expectations for Federal Reserve rate cuts in September have recently helped boost stock prices, Shalett believes this is insufficient to sustain small-cap stocks. "They need rate cuts far exceeding 100 basis points, and we're unlikely to receive adequate policy support," she said.
Regarding reasons why investors should avoid popular meme stocks, Shalett presented similar arguments, with an important factor being that such companies mostly belong to the small and mid-cap sectors. "Investors should not allocate funds to companies that rely solely on optimistic economic forecasts," she emphasized.