Morgan Stanley: Buy the election, sell the inauguration

U.S. stocks have rallied since the election, but it's time for investors to start thinking about getting out, possibly timed for President-elect Donald Trump's inauguration, Morgan Stanley said.

"We are worried that there is arrogance in telling people that they should be worried, but to stay bullish for now," Morgan Stanley said in a note dated Tuesday.

"Part of us thinks we should just sell the inauguration. After all, what incrementally positive and exciting outcomes could be produced in the first few weeks after that?"

The U.S. banking giant's research arm noted that it had remained optimistic on U.S. equities for several years, even as it expected low earnings growth and some valuation-multiple expansion. But now, it expects "material" earnings growth and multiple contraction.

The rally since Trump's surprise win has been sizeable. The Dow Jones industrial average has gained around 9 percent, to a hair's breadth from the 20,000 mark. The S&P 500 is up around 6 percent, tapping record highs.

"To us, it is WHEN, not IF we should fade this recent reflation trade," it said.

Morgan Stanley set its base-case target for the S&P 500 at 2300 at end-2017, marking 16.2 times its 2018 earnings forecast, compared with Tuesday's close at 2257.83.

Morgan Stanley said there was clearly a lot of earnings uncertainty ahead, but it still forecast that the S&P 500 earnings would be about 18 percent higher in 2018 than in 2016.

But it noted that the biggest driver of that increase – more than 50 percent of it -- would come from Trump's promised corporate tax cut to 20 percent from 35 percent. Another 30 percent of the earnings rise over the next two years would likely come from fiscal stimulus and nearly 27 percent from acceleration in share buybacks, it added.

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