Correction warning after surge in US stocks

US stocks put in a strong performance last month, with the S&P 500 hitting a new high, but they are overbought and at risk of a correction after their recent surge, says Morgan Stanley's Mike Wilson.

They rose broadly on Tuesday, sending the S&P 500 toward another high of 3,678.45 points. S&P 500 futures fell 0.04 percent yesterday.

One key risk that most people are overlooking is that Treasury yields continue to march higher, which could create jitters that send stocks lower, said Wilson, the firm's chief investment officer, who began his career at the bank more than 30 years ago.

"The market is overbought, and the market is probably a little bit overvalued quite frankly because interest rates are finally now starting to catch up," Wilson said on Bloomberg TV. "The risk in the market now is that as 10-year yields finally start catching up, we have a valuation reset because stocks are a long-duration asset, particularly the US stock market."

Surging Treasury yields this week amid renewed optimism about a US stimulus program and positive vaccine news are leaving some investors nervous that a higher discount rate may eventually require an adjustment lower in equity valuations with stocks at all-time highs.

The S&P 500 Index is coming off a record monthly gain and is trading at valuations last seen at the bursting of the dotcom bubble.

Wilson, who is also the company's chief US equity strategist, said any selloff in stocks may be a buying opportunity.

"It's gotten a little frothy here in the last couple of weeks," he said. Any correction would be welcome, "because it would make me more comfortable putting additional capital to work."

Meanwhile, the US dollar is dropping to multi-year lows against its peers in December.

The euro and the Australian and Canadian dollars and the Korean won all touched their highest levels in more than two years this week, while the Swiss franc is at its strongest since 2015. The pound is just shy of its one-year peak, despite uncertainty over Brexit trade talks.

More weakness in the greenback may come as asset managers build record short bets.

With optimism over US stimulus talks, bets on a successful roll-out of vaccines and China's economic rebound driving bets for global growth, demand for the world's reserve currency has fallen.