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NEWS
The Case For Diversification

It was a relatively muted day in the market, as investors took some gains off the table and positioned for a busy next week of earnings. Six of the “Magnificent Seven” stocks are set to report, with the Federal Reserve’s commentary going to be a major focus on Wednesday. Notably, Chinese stocks continue to catch a bid, suggesting some think Trump’s eventual actions may not match his “tough talk.” 👀

Today's issue covers Morgan Stanley’s contrarian call, The Weekend Rip’s blockchain/smart contracts discussion, and other notable pops & drops. 📰

Here’s the S&P 500 heatmap. 6 of 11 sectors closed green, with utilities (+1.02%) leading and technology (-1.04%) lagging.

And here are the closing prices: 

STOCKS
Morgan Stanley Makes A Contrarian Call 🤔 

With U.S. stocks continuing to outperform to start off 2025, one Wall Street bank is diverging from the pack by encouraging its clients to diversify.

Morgan Stanley’s Global Investment Committee has repeatedly urged investors to seek maximum portfolio diversification in 2025, suggesting it could deliver better risk-adjusted returns than a “buy-and-hold” strategy. ⚠️ 

Here are the five main concerns the bank raised in its note:

• High valuation and S&P 500 concentration: 22x forward earnings places it in the 95th percentile of historical valuations over the last 35 years. The ten largest stocks account for nearly 40% of the total market cap.

• Optimistic earnings expectations: Wall Street analysts’ estimates may be too optimistic, expecting 13% earnings growth in 2026 and 1% in 2026. This relies heavily on the “Magnificent 7” continuing to grow rapidly.

• Better opportunities beyond passive U.S. equity exposure: Other regions, sectors, and asset classes offer opportunities that may outpace the S&P 500’s expected 7% return in 2025.

• Positive stock-bond correlation: Recent trends have shown these assets moving in tandem, underscoring the importance of diversifying beyond traditional asset classes to mitigate risk.

• Policy uncertainty: Markets are not fully appreciating the considerable uncertainty around the new U.S. presidential administration’s policy decisions.

The bank doesn’t disclose all its recommendations for diversifying but alluded to a variety of options, including foreign equity positions in Japan, emerging markets (EM), and global European brands. 🧺 

With meme coins flying and the major U.S. indexes sitting near all-time highs, it appears that Morgan Stanley’s warnings may go unheeded. But nonetheless, there one of the few banks raising doubts about the path of risk assets.

Still, it’s important to note that despite their caution, they’re not calling for a decline in U.S. stocks. Their year-end price S&P 500 price target of 6,500 implies roughly 8% growth, but they clearly believe the path to that return may be bumpy and that other assets could provide a better nominal or risk-adjusted return. 🤷 

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