Investment implications are a preference for European stocks over U.S. and a view to companies that can maintain operating margins. This will be require a "sector and stock-specific" focus as the bull market hits its peak later in 2018.

"The feelgood aspects of said policy appear at or nearly in the price of US markets, whereas the downsides are less accounted for," the 31-page research paper said. "While there's a fair amount of debate about how much this fiscal expansion extended the economic cycle, for markets our analysis suggests we're closer to the end of the day than the beginning."

The firm maintains that boosts from fiscal policy are largely priced into the market and unlikely to last much longer.

Investors hoping that tax cuts and aggressive government spending plans will add another leg to the bull market likely are going to be disappointed, Morgan Stanley argues in an analysis that contends the end of big returns is near.

The fairly dour forecast comes a year after the posted a 20 percent gain and as the Dow industrials are still up nearly 40 percent from the time of President Donald Trump's election in November 2016.

After much wrangling, the president was able to push through a $1.5 trillion tax cut package in December, and signed a $1.3 trillion omnibus spending bill earlier this year. The administration has said the tax cuts in particular will spark a wave of business investment, but it's become less clear how effective they will be in stimulating stocks.

The market is little changed since the start of 2018.

"Our historical analysis suggests that there may be a benefit for markets from deficit-funded tax stimulus, but the boost in returns appears temporary and is not statistically significantly higher than periods without stimulus," Morgan Stanley said. "Moreover, markets tend to underperform with policies similar in size to the Trump tax cuts."

Any gains that do come from big fiscal stimulus packages "tend to be a) modest; b) temporary; and c) more pronounced in smaller measures than larger ones."

Riffing on the Ronald Reagan slogan of "Morning in America," the strategists said this period is more like "happy hour in America."

"Accordingly, we see peak margins and rate of change on organic earnings growth coming by late 2018/early 2019 and believe we already saw peak valuations before the tax bill was enacted," they said. "We advocate a focus on sector and stock-specific alpha as these late-cycle dynamics portend narrowing markets and a cyclical top for equities later this year, in our view."

The firm also is warning that the next recession could be deeper than many economists are now forecasting. Conditions could be further constrained should a push for austerity occur as the budget deficit begins to swell.

"Based on analysis of similar supply-side policies historically, we find that there could be a reasonable boost from growth-motivated stimulus, but it's not long-lasting; it's worse for policies with larger deficit implications, and the upside may have been frontloaded," the firm said.