FILE PHOTO: The corporate logo of financial firm Morgan Stanley is pictured on the company's world headquarters in New York, U.S. April 17, 2017. REUTERS/Shannon Stapleton

LONDON (Reuters) - Morgan Stanley cut its exposure to U.S. equities and increased its weighting in European equities on Wednesday, saying the U.S. stocks’ strong recent rally made it unlikely they could continue to outperform this year.

“U.S. stocks have outperformed and are now close to our year-end price target with limited upside, while the backdrop for European stocks outperformance is intact,” the U.S. bank’s strategists said in a cross-asset note.

They increased their overweight in European equities from 2 percent to 3 percent relative to the benchmark, and cut their U.S. equities overweight to 1 percent from 2 percent.

The S&P 500 .SPX has shot up more than 9 percent since the start of October 2017, while Europe's STOXX 600 has managed less than a third of that return over the same period.

The cross-asset strategists kept their preference for equities over bonds, with credit the least favored, in a late cycle environment they said was heading for a “tricky handoff” at the end of the first quarter with PMIs likely to peak and inflation potentially rising.

“We think the best ‘reflation’ plays lie in being overweight energy and financial equities,” they added.