The trading range strategy is, not surprisingly, one of Morgan Stanley’s favorite, and Wilson urges clients to buy US stocks broadly when the index nears 16x… unless one of two things occurs: either 10-year rates move above 3.25%, or we get a proper growth scare for the economy and/or earnings that could push up the equity risk premium beyond 350bp.

While Morgan Stanley doesn’t expect either to occur in the near term, it discussed the risk it may be wrong. There are three specific problems they cited that investors need to be aware of:

First, while our rates strategists still expect lower 10-year Treasury yields by year-end, the recent move through 3% suggests that 10-year rates could see a technical blow-off like equities had in January. A fundamental catalyst for such an acceleration could be the next employment report if it shows further signs of strength, and if rising labor costs finally start to appear in the government statistics. We mention this specifically because more individual companies mentioned rising labor costs during 1Q earnings season than in prior quarters.

Second, while we are not yet seeing evidence of falling economic growth, we expect — with near- certainty — that we will have a peak rate of change in S&P 500 y/y earnings growth by 3Q thanks to the spike created by the tax cuts. This was something we cited in our 2018 outlook and one of the primary reasons why we thought P/Es would contract. The good news is that this has already occurred. The risk for further P/E compression comes if markets start to worry that it’s not just a deceleration of growth on the backside of the peak, but an outright decline in growth.

As shown in the Exhibit, consensus forecasts do not expect negative growth, but it’s worth considering the potential risk of “disappointment” later this year and in 2019, for two reasons. First, earnings growth expectations for 4Q and 2019 look high to us, given the extremely difficult comparisons created by the tax cuts. Second, even in the absence of an economic recession or material slowdown, we do see growing risk to y/y growth of consumer spending due to the extraordinary one-time boosts that began late last year — hurricane relief, tax cuts and the interest in  cryptocurrency, not to mention the seeming euphoria in stock markets in January that looks unlikely to be repeated.

 Related: How Much is Your Broker Costing You? It’s More Than You Think.