The Wall Street firm is cautioning investors not to chase the ever-rising S&P 500 index right now—and instead sees promise in sector rotation toward cyclicals. Morgan Stanley Wealth Management’s chief investment officer Lisa Shalett wrote in a note Monday, “Our view is that the index will be rangebound for the next three to six months,” pointing to head winds from “shifting dynamics,” as “inflation expectations are rising, yield curves are steepening, and the U.S. dollar is weakening.” A mix of those factors, Morgan Stanley estimates, will cap the S&P 500 at around 3,250 while still keeping the index above the 2,650 range due to the unprecedented monetary and fiscal support. It closed Monday at 3,232.

Make no mistake, the firm says we’re firmly in a new bull market. The S&P 500 has been on a massive surge, gaining roughly 8% in the past two weeks. Remarkably, the benchmark index is only about 4.5% off from its all-time high in February. And unemployment, while still staggering at 13.3%, surprised to the upside, ticking down from 14.7% in April, and signaling that recovery is underway as reopenings thus far have been relatively smooth. In fact, Morgan Stanley cautiously believes a V-shaped recovery is possible. But even with that run-up, investors would be right to ask: Was it a blip, or is the rebound sustainable?

There are four factors to consider at present that “might inhibit the broad tech-dominated index while flattering cyclical and value-oriented sectors and stocks,” writes Shalett. One is the rise in inflation expectations as the Fed pumps liquidity into the system. Indeed, the inflation rate (measured by the 10-year breakeven rate) increased to over 1.22% from 0.5% since mid-March, the firm notes. Plus, the Treasury yield curve is steepening between the two-year and both the 10-year and 30-year yields, and Shalett believes this kind of yield curve usually doesn’t support the kind of growth stocks that power the S&P 500, but instead presents a “tail wind” for cyclicals.

Weak dollar, expensive stocks

Meanwhile, unlike previous rounds of quantitative easing, the firm notes, the U.S. dollar appears to be weakening. (In fact, the firm points out that since the March 23 bottom, the U.S. Broad Trade-Weighted Dollar Index declined nearly 5%.) A weaker U.S. dollar is good news for emerging markets and global growth, but it spells potential issues for companies with big global supply chains and those “importing intermediate components,” as lots of big tech companies do, driving inflationary pressures, Shalett writes.

Also in the spotlight is the massive run-up in valuations in recent months. The index is currently trading at around 25 times the next 12 months’ earnings, according to S&P Global data, and many of the biggest names leading the rally have seen price/earnings ratios skyrocket, hitting new highs amid the crisis. In addition, 2020 earnings are going to be a muddled picture, as many companies have withdrawn guidance and anticipate poor earnings for the year. With current valuations so high, Charles Schwab’s Liz Ann Sonders recently told Fortune, “We’re set up for some risks here.”

Right now, Morgan Stanley says valuations relative to real economic activity are “extreme” when comparing U.S. market capitalization with nominal U.S. GDP. Shalett notes that “based on the latest revision of first-quarter GDP and the Fed’s calculation as of the end of May, that ratio is now 156.3%, the second-highest reading since 1951 when the data series began,” and close to the peak hit in 2000. On the other hand, some cyclical sectors (like financials) are trading at a much lower valuation, even with “modest expectations for a reflationary rebound,” Shalett writes.

In fact, according to a UBS note on Monday, the strongest rally in the past week was in value stocks and cyclical sectors, as the MSCI World Value Index rose 7.9% over the week and pushed some airlines (like American Airlines) up over 50%. UBS is telling investors to expect cyclicals and midcaps to outperform, the firm said in a note Monday, while there is potential for value stocks to “catch up.”

The bottom line for Morgan Stanley’s Shalett is that while the Fed’s unprecedented support is a “powerful propellant,” its “biggest impact” likely won’t be to support valuations of growth stocks in the S&P 500 but, alongside fiscal policy and pent-up demand from consumers as the reopenings begin, serve to give the biggest boost to a cyclical rebound for investors in the next three to six months.

Although the “argument for simply playing the index is powerful and supported by the past decade’s dynamics and playbook—in essence, the ‘don’t fight the Fed’ adage,” Shalett writes, at present she sees promise outside the S&P 500 and suggests stock picking among “quality, cash-flow leaders in small- and midcaps, cyclicals, value, and non-U.S. stocks” where she sees structural stability, while cutting a bit of exposure to the index.