While stocks soared almost unprecedentedly higher in January before collapsing in February, market valuations did not peak two weeks ago…

In fact, equity market P/E actually peaked back on December 18th, the day before Trump Tax Bill passed The Senate.

This was a pleasant surprise to Morgan Stanley’s Equity Strategy group, because, as they write in a new note today, “we always viewed the tax passage as a likely place for the rally to take a pause.”Of course, that didn’t happen as earnings revisions far outweighed the multiple compression.

Nevertheless, MS’ Michael Wilson writes:

We find it instructive and rational that the market multiple did in fact peak that day. It also makes us feel a little better than our instinct was right even if our call for a market pause was wrong!

Furthermore, we find it instructive that Bitcoin also peaked on December 18th.

Coincidence? We don’t think so.

Instead, we think the passage of tax cuts coincided with peak excitement, at least in terms of price/valuation and “speculation” as represented by things like Bitcoin.

Morgan Stanley notes that their expectations of rising equity vol led by rates/FX vol and earnings estimate dispersion, are playing out, which they suggest should lead to lower multiples on higher, albeit lower quality, EPS driven by tax cuts but accompanied by falling operating margins.

Finally, they conclude, this vol shock/liquidity event has likely taken valuations too low at this point but realize such events have a way of overshooting to the downside which is why we have advocated patience in buying this dip.