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Wall Street Says Buy the Dip as Virus Fears Won’t Halt Rally

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(Bloomberg) -- Investors should look through the latest spike in Covid-19 infections and the threat of lockdowns across Europe, as the flare up won’t derail the equities rally, according to some of Wall Street’s top strategists.

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“While the latest Covid-related headlines create some near-term uncertainty, they are unlikely to signal a meaningful change to the economic or earnings outlook,” Morgan Stanley’s Graham Secker wrote in a note. The fourth wave “is unlikely to be a material, or sustained, problem,” JPMorgan Chase & Co. strategists led by Mislav Matejka concurred.

For its part, Goldman Sachs Group Inc. recommends owning cyclical equities led by stocks that benefit from the reopening of economies.

“While virus counts are now rising and weighing on reopening stocks, as the winter wave passes, declining virus and inflation headwinds should provide a near-term boost to corporate revenues and margins for the businesses most exposed to these challenges,” strategists led David J. Kostin wrote in a note.

The chorus of reassuring messages comes as countries across Europe impose ever tougher restrictions -- going as far as full lockdowns -- to curb a spike in infections and hospitalizations. European and U.S. stocks have hit successive records this year, with the virus having dropped beneath the radar of equity strategists and fund managers alike.

The house view of all three major Wall Street investment banks is that the advance of European stocks will continue into next year and the recent flare-up in infections will prove only a temporary blip. Some European asset managers, such as UBS Global Wealth Management, are equally bullish.

“It is clear that the large gap that opened up between cases and hospitalizations is holding, due to vaccines, which is a big positive,” the JPMorgan strategists wrote. “Most importantly, this could end up the last winter when hospitalizations from Covid-19 are significant enough to drive mobility restrictions,” they said, citing the imminent introduction of antiviral pills from Merck & Co. Inc. and Pfizer Inc.

To be sure, not everyone is so sanguine. “Covid-19 is turning into a more persistent drag on growth,” Fidelity International’s Romain Boscher wrote in a note Monday. “Vaccines are proving effective in breaking the link between infections and hospitalizations but not in stopping cases altogether - the virus is here to stay.”

(Updates with Fidelity International comment in last paragraph)

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