Fading Fed balance sheet support and accelerating lending growth create a liquidity squeeze, pressuring equities into July.
Morgan Stanley’s chief US equity strategist highlights a 75% decline in the Reserve Management Program from its peak and a 50% cut in Treasury buybacks as key liquidity headwinds. These factors, combined with rising lending growth, are draining capital from markets, creating a pincer effect on liquidity expected to persist through July.
The warning follows last week’s FOMC meeting, where the yield curve bear-flattened and the dollar strengthened, aligning with Morgan Stanley’s framework. Precious metals’ sell-off further signals a shift toward Fed credibility, though the near-term outlook for equities remains choppy and corrective.
While the firm maintains a longer-term constructive view, the current liquidity squeeze delays the next leg of the earnings-led bull market. The S&P 500-to-gold ratio has climbed nearly 40% since March, underscoring the tension between liquidity constraints and valuation support.