Welcome to Thoughts on the Market.

I'm Andrew Sheets, Chief Cross Asset Strategy

for Morgan Stanley.

Along with my colleagues bring you a variety of perspectives,

I'll be talking about trends across the global investment landscape and how we put those different ideas together.

It's Friday, July 12th, at 2 p.m. in London.

We recently downgraded our view on global stocks, lowering our recommendation to underweight. This is our lowest

recommendation in the last five years and an important change in view. We're making this

change because our return expectations for stocks are unusually low, a property that we do not think is improved by

central bank action or poor return potentials in other asset classes. What do we mean

by low potential returns for stocks? Well one method is to look at the returns that are

forecast by Morgan Stanley's own strategies. These teams set their market price

targets through detailed analysis of earnings trends, investor flows, market

valuation, and current global developments.

At the moment a key view of these teams is that the market's expectation for corporate earnings

over the next 12 months are simply too high, limiting the potential for further market gains.

Across the stock markets in the US, Europe, Japan, and emerging economies,

Morgan Stanley's equity strategist forecast gains of just 1% over the next 12 months.

So how about a second opinion?

Another way to estimate how much equities might make over the next 12 months is to start with

current valuations and adjust that based on what's historically happened given current economic data.

That's the approach that our team runs. Unfortunately, we get a similar answer as our equity strategies.

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