According to an analyst note from Morgan Stanley, as the economy reaches its peak, investors should consider safer options in the market. The firm suggests that defensive sectors such as health care and utilities are the best choices in this scenario. Andrew Pauker, the analyst who wrote the note, explains that both macro data and equity market internals indicate a late cycle market environment. To capitalize on this market condition, Morgan Stanley recommends a combination of traditional defensive stocks, select growth opportunities, and late-cycle cyclical names, calling it a “barbell” strategy. Pauker believes that this approach has historically outperformed the broader market during late cycle regimes.
However, it is important to note that Pauker advises a stock-picking approach due to the high level of stock-specific risk in the current market. For investors looking to follow this strategy, Morgan Stanley has provided a list of their favorite stocks in the slow-growth environment.
In the traditional defensive sector, health care remains Morgan Stanley’s preferred choice, despite its underperformance against the broader market so far this year. The firm sees health care as a late cycle outperformer due to its growth properties and historical track record. Within this sector, biotech and pharmaceutical names, health-care providers, and services are particularly attractive. Walmart is one of Morgan Stanley’s top picks, with the company expected to show accelerating EBIT growth and ongoing share gains. Thermo Fisher Scientific, a life sciences company, also makes the list despite near-term challenges. Morgan Stanley believes in the company’s long-term fundamentals and expects it to return to growth in the future.
For select growth opportunities, Morgan Stanley analysts recommend Costco and Colgate-Palmolive, citing their stability and attractive growth properties. The consumer staples sector, including these two companies, has a consistent record of late-cycle outperformance. Yum Brands and McDonald’s, popular consumer food companies, are also considered growth stocks based on their market capitalization and volatility. Other growth-oriented defensives include UnitedHealth Group and Eli Lilly in the health-care sector, which can benefit from advancements in artificial intelligence and machine learning.
In the late-cycle cyclical category, Morgan Stanley highlights several energy companies such as Marathon Oil, Valero Energy, and ConocoPhillips. Marathon Oil is seen as offering high levels of free cash flow and total return yields, making it an attractive choice. ConocoPhillips is also noted for its strong free cash flow generation and cash returns. Freight transportation company Knight-Swift Transportation is another favorite in this category, with the analyst praising its scale and exposure. Defense giant Northrop Grumman, Howmet Aerospace, and Delta Airlines also make the list.
Overall, Morgan Stanley’s recommendations aim to provide investors with a strategy that can outperform the broader market in the current late-cycle market environment.