Morgan Stanley’s European equity strategists said their Market Sentiment Indicator (MSI) has issued a "buy signal,” for the first time since the fourth quarter of 2023.
Historically, European equities have delivered positive returns approximately 70% of the time over two weeks, one month, and three months following a "buy signal" from similarly low MSI levels, strategists note.
According to the team's investor survey, stocks related to "AI winners" and those sensitive to interest rates may be among the first to attract buying interest.
The MSI combines data from surveys, positioning, volatility, and momentum to measure and quantify market stress and sentiment.
"We have been monitoring the MSI closely as we've found it backtests particularly well for more sustained technical signals in European equities,” the strategists said in a note.
The strategists draw parallels between the current growth scare and a similar situation during the mid-1990s soft landing, specifically in late 1995 and early 1996.
They highlight that the "Tech Titans" of that era were the first to experience the growth scare but also the first to recover. Europe's rate-sensitive stocks similarly outperformed during and after that period, a trend that mirrors today’s market dynamics.
"Near term, we note a busy and somewhat noisy US economic data calendar which can continue to drive choppiness in markets,” the strategists point out.
While they expect the soft landing to ultimately be reconfirmed, they caution that this process may take time. Nevertheless, they maintain that European fundamentals remain directionally solid.
In a separate note published Tuesday, Morgan Stanley said that its global MSI indicator has turned positive, indicating a shift toward a “risk on” appetite after maintaining a neutral stance since January.
Traditionally, such a shift has been associated with above-average one-week returns for global equities.