(Bloomberg) -- Morgan Stanley cut its recommendation on U.S. equities to underweight and its call on global stocks to equal-weight, citing “outsized risk” to growth through October.

Rising cases of the delta strain of Covid-19, and tension between elevated inflation expectations and low yields and easy monetary policy are at play during a time “that has historically poor seasonality,” strategists including Andrew Sheets wrote in a note on Tuesday.

The investment bank’s caution on U.S. equities comes as the S&P 500 Index has outperformed global equities this year to make new records, even as coronavirus infections have started rising again in many parts of the world, and as the U.S. Federal Reserve edges closer to setting a path toward tapering stimulus.  

Morgan Stanley said it prefers stocks in Europe and Japan in its global allocation. “We buy Brazil equities, sell gold and stay short U.S. duration, on the belief that all reflect too much growth pessimism,” they added.

They highlighted five key themes for investors to consider: divergences in central bank policies, vaccination drives, valuation divergence, echoes of 2004 in the credit market and a recovery in consumption of services.

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