Morgan Stanley Wealth Management is advising clients to diversify their investment portfolios amidst growing concerns over the S&P 500's valuation. Lisa Shalett, the chief investment officer and head of the wealth management unit's global investment office, describes the S&P 500 as "both excessively concentrated and expensive." On Wednesday, the S&P 500 reached a new all-time high, driven by investor optimism following President Donald Trump's inauguration. However, the global investment committee at Morgan Stanley expresses apprehension regarding the current market conditions and the index's elevated valuation.
The committee's caution stems from the belief that expectations for earnings growth are overly ambitious. Adding to the uncertainty, it remains unclear how President Trump's policies will impact Wall Street. Shalett highlights the need for a balanced investment approach, suggesting that investors pair their domestic stock and bond holdings with equities from international markets such as Japan, Europe, and emerging markets. She warns of a "radical valuation dispersion" between U.S. assets and those from the rest of the world, creating significant challenges for domestic markets.
"Policy uncertainty from the new administration appears underpriced. 2025 is not at all like 2017, and we view the risks as much higher," Lisa Shalett stated.
In response to these concerns, Shalett's team recommends various investment alternatives. They see potential in credit and spread products, energy infrastructure master limited partnerships (MLPs), and residential real estate investment trusts. Additionally, they advocate for market-neutral and absolute-return hedge fund strategies and high dividend stocks as viable options for portfolio diversification.
"Radical valuation dispersion," Shalett elaborated on the current market discrepancies.
Shalett's guidance emphasizes the importance of diversification in an uncertain economic environment. By exploring opportunities beyond domestic markets, investors can potentially mitigate risks associated with the S&P 500's current valuation levels. Her team continues to monitor market developments closely to adjust their recommendations accordingly.