At a time when Wachovia will continue to raise interest rates to fight inflation, low consumer confidence has become a key risk for the US stock market and the economy, according to strategists at Morgan Stanley.

Michael Wilson and other bank strategists wrote in a report on Monday that the decline in confidence not only poses a risk to the economy and markets from a demand perspective, but will also keep the Fed on its hawkish road to fighting inflation against the backdrop of Friday's inflation figures.

Us inflation rose to a 40-year high in May and consumer confidence plunged to its lowest level since 1978 in early June. The sharp fall in US stock futures suggests that the S & P 500 could approach a bear market again on Monday as investors worry that the latest inflation data could prompt the Fed to extend its aggressive rate hike into the autumn.

Wilson, who has been one of Wall Street's best-known bears, accurately predicted the latest sharp fall in the market. Morgan Stanley's strategists point out that while the market trend has reflected the pressure on profit margins and the decline in consumer demand, the risk of excess inventory is only just beginning to be reflected in stock prices. They reiterated the low allocation of consumer necessities stocks.

At the same time, Goldman Sachs Group strategists such as David J. Kostin said that US corporate profit forecasts are still too high and are expected to be further revised.

Despite the sell-off in the S & P 500 this year, "stock market valuations are far from depressed," Kostin wrote in a report.

Goldman Sachs Group predicts that stock valuations will remain roughly the same, while earnings growth will push the S & P to 4300 by the end of the year, with about 10 per cent upside from current levels.