U.S. stocks have been a winning investment these last two years, on what proved to be a correct bet that corporate earnings would recover from the coronavirus pandemic, as well as the low interest rates and fiscal stimulus that have heated up the global economy.

Strategists at Morgan Stanley say investors should resist buying U.S. stocks as part of their 2022 preview, in which they argue that the “hotter, faster” cycle advances.

“Good growth and moderating inflation would seem like another version of ‘Goldilocks’, and for some assets we think that the backdrop does look benign. But we think that 2022 is really about ‘mid-to-late cycle’ challenges: better growth squaring off against high valuations, tightening policy, rambunctious investor activity, and inflation being higher than most investors are used to,” said strategists led by Andrew Sheets.

They see downside to the S&P 500 as well as U.S. Treasurys, and say it’s too early to turn bullish on emerging market equities. They target a S&P 500
SPX,
+0.72%

of 4,400 by the end of 2022, and a 10-year Treasury yield
TMUBMUSD10Y,
1.543%

rising to 2.1%.

U.S. stocks have much more elevated valuations and profitability to prepandemic levels, while also facing the largest expected rise in inflation-adjusted interest rates.

Instead, they like equities in Europe and Japan, as well as the Canadian dollar vs. the Swiss franc
CADCHF,
+0.05%
.
European stocks, as represented by the MSCI European index, can deliver 8% price returns and Japan
180460,
+0.39%

12% price gains, they say.

They prefer energy over metals, with Brent crude
BRN00,
-1.14%

trading above $90 in early 2022 before easing to $85. They’re negative on gold
GC00,
-0.19%

on expectations of higher real rates and a stronger dollar.

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