AsianFin -- Wall Street firms are growing more cautious on Chinese stocks as ongoing deflationary pressures and rising geopolitical tensions weigh on earnings prospects in the world’s second-largest equity market.

Morgan Stanley strategists, including Laura Wang, noted in a report on Sunday that the Chinese government is likely to prioritize fiscal stimulus for consumption and housing in 2025. However, they expressed concerns over potential moral hazard and the risk of prematurely shifting towards a "welfare state." These factors are expected to create significant headwinds for corporate earnings and market valuations in the coming months.