Morgan Stanley stated before the most recent Federal Reserve meeting that they thought a 50 basis point rate drop by the Fed would be the greatest short-term scenario for stocks without raising questions about the pace of economic expansion.

The strategists do, however, reaffirm that labour data will probably have a greater impact on stock performance than other variables over the next three to six months, both at the index and sector levels.

The upcoming employment data is anticipated at the end of the week, and they predict that an upward surprise will be required to initiate a long-term cyclical rotation in the US market.

In addition to labour statistics, the strategists track many other factors to evaluate the economic direction.

The breadth of earnings revisions is one important metric that they consider to be the strongest indicator of corporate forecast. In this regard, the Russell 2000 small-cap index and other lower-quality sectors are moving downward, but the S&P 500 as a whole is still flat. In the upcoming month, seasonal conditions may provide further challenges for revision breadth.

Another area of concern is the ISM Manufacturing PMI, which has been stagnant for more than two years and has not shown any indications of recovery; in contrast, ISM Services has demonstrated greater resiliency.

Morgan Stanley notes that equities in the materials and industrial sectors are most likely to profit short-term from China's stimulus policies, but they do not anticipate a major impact on U.S. labour dynamics or GDP.

Experts also point out that the August budget deficit was about $90 billion more than expected, raising further questions about the sustainability of the fiscal plan at a time when the debt-to-GDP ratio is at all-time highs. This fiscal stimulus fuelled by the deficit has aided in growth but has also driven out certain segments of the private sector.

The markets are constantly monitoring inflation since a decline below the goal might cast doubt on whether such deficits can be sustained over the long run.

(Sources: investing.com)