Markets May Be 'Tiptoeing' Into Valuation Shock, Morgan Stanley's Caron Says

• Rising oil prices are causing a 'price shock,' leading to lower equity prices as future cash flows are discounted at higher interest rates.
• The key debate is whether this price shock will escalate into a 'growth scare' or 'recession risk,' which would then become a more severe 'valuation shock' with longer-lasting market downturns.
• Caron observes a steepening yield curve (2-year yields down, 10-year yields up), suggesting the market is beginning to price in a potential valuation shock, but he doesn't see it as the base case yet.

Jim Caron of Morgan Stanley discusses the market's reaction to rising oil prices and geopolitical risks, distinguishing between a 'price shock' and a potential 'valuation shock.' He notes that while current conditions are a price shock, the market is worried about a longer-lasting valuation shock if growth fears increase. Investors are currently in a 'waiting game' and reducing risk heading into the weekend.