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Why Morgan Stanley Downgraded Small-Cap US Stocks

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Morgan Stanley on small-cap US stocks

Previously, we discussed Morgan Stanley’s (MS) optimistic views on major defensive sectors. It has downgraded the technology sector as it believes its strong earnings growth has already been priced into markets and trade war tensions could affect the sector’s revenue. The investment company also downgraded small-cap US stocks to “equal weight” on July 9, as it believes their recent strong rally has also been priced into markets.

The iShares Russell 2000 ETF (IWM), which tracks small-cap US stocks, had risen 10.4% year-to-date as of July 12, while the S&P 500 (SPY) had risen 3.5%. A rally in small-cap stocks is considered a positive sign for the bull market.

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On June 26, in an interview with CNBC, LPL Financial senior market strategist Ryan Detrick said, “Small-cap leadership is a good thing,” adding that “it could be carving the way potentially for this bull market to continue as the S&P’s second half of the year also does well.” However, Morgan Stanley’s recent downgrade of small-cap stocks signals there could be some danger ahead for the bull market. For more on analysts’ ratings, read Why Goldman Sachs Has an ‘Overweight’ Rating on Commodities

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