Morgan Stanley downgraded its global stocks on fears that slowing GDP growth around the world will offset central banks support.

Chief cross-asset strategist Andrew Sheets told clients in a note that despite Wall Street's confidence in a more accommodating Federal Reserve, investors haven't fully appreciated the odds of weaker economic growth in the months to come.

"Over recent weeks, you've heard us discussing why we think investors should fade the optimism from the recent G20," Sheets wrote in the July 7 note. "Why we think bad data should be feared rather than cheered because it will bring more central bank easing. Why we think the market is too optimistic on 2019 earnings and is underestimating the pressure from inventories, labour costs and trade uncertainty."

"The time has come to put our money where our mouth is," he said. "The positives of easier policy will be offset by the negatives of weaker growth."

The strategist noted that over the next 12 months, there is now just 1% average upside to Morgan Stanley's price targets for the S&P 500, MSCI Europe, MSCI EM and Topix Japan. The S&P 500 clinched all-time and closing highs on July 3 on the back of investor hopes that the Fed will ease interest rates at its two-day policy meeting at the end of the month.

The Morgan Stanley strategist argued that investors still haven't learned that when easier policy meets weaker growth, the latter tends to matter more for stock market returns. That, in turn, suggests that stocks could be set for poor returns given global trade worries, softening PMI data and diminished inflation expectations.

Putting it all together, Sheets said that second-quarter earnings could prove painful for investors, who remains overly confident in current 2019 projections.

"The market is underpricing the risk that companies lower full-year guidance. Just think about how much has changed since 1Q reporting in mid-April," he wrote. "A US-China trade deal that was widely expected to be resolved led instead to a new round of tariffs. Global PMIs have continued to fall. And Morgan Stanley's Business Conditions Index, a survey of how our equity analysts feel about their companies, suffered its largest one-month decline ever in June."

To that end, Morgan Stanley is underweight both equities and credit, equal-weight government bonds and overweight cash. Sheets wrote that the brokerage's favorite asset class remains emerging market fixed income.