Topline
The S&P 500 will soon wipe out all of its year-to-date gains as the market properly prices in the weak macro environment, Morgan Stanley strategists said in a Monday note to clients, though the oft-bearish analysts offered various picks for stocks set up well for the turbulence on deck.
Bulls have outlasted bears thus far in 2023, but that could soon change.
Key Facts
The analysts, led by the bank’s top investment strategist Michael Wilson, set a 3,900 year-end target for the S&P, indicating 8.9% downside from the index’s 10-month high set Friday, capping a recovery mostly driven by mega-cap tech names boosted by artificial intelligence-related growth prospects.
AI optimism won’t “be able to stop, or even cushion” the upcoming earnings recession, cautioned Wilson, calling for a “proper reset on valuation” that better reflects historical financial fundamentals in stock prices.
Still, Wilson and company offered up numerous picks for equities best-positioned to weather the upcoming storm.
Morgan Stanley is broadly bullish on the consumer staple sector, which often outperforms peers in recessionary times, as well as companies with strong pricing power, who tend to do well in times of high inflation; food conglomerate Mondelez and tobacco giant Philip Morris are the two stocks who fit in both buckets.
With spending at the corporate level growing tighter, the bank screened for companies with the highest returns on invested capital, the strongest operational efficiency and buy ratings from Morgan Stanley research analysts.
Healthcare stocks AbbVie, Cardinal Health and McKesson fit the billing, along with pizza delivery chain Domino’s, retailers Costco, Home Depot and Lowe’s and oil refiner Valero.
Key Background
Stocks are amidst a remarkable comeback this year, shaking off a variety of worrisome events – such as three of the four largest bank failures in U.S. history, the Federal Reserve’s decision to hike rates to a nearly 20-year high and the federal government’s near default on its debt – on their way to new heights. The S&P is up 20% since bottoming in October, though it remains 12% below its December 2021 peak.
Crucial Quote
“The consensus view that the worst of pressures is behind us will be proven wrong,” JPMorgan analysts led by Mislav Matejka wrote Monday, referring to hopes that central banks will back off their monetary tightening campaigns as inflation comes down and concurring with Morgan Stanley’s view that corporate profits will largely fail to keep pace with Wall Street’s lofty expectations at this point.
Further Reading
Nasdaq, S&P 500 Set 2023 Highs (Forbes)
Legendary Investor Strategies And Stocks For The Current Market (Forbes)
Source: https://www.forbes.com/sites/dereksaul/2023/06/05/morgan-stanley-says-sp-500-will-slide-9-by-years-end–but-these-stocks-could-weather-the-storm/