The Morgan Stanley equities team now thinks a "tipping point" has been reached in the investment cycle for US stocks.
And as a result, it says the relative advantage of growth stocks compared with value stocks — a dynamic in play for the past 10 years — could be coming to an end.
That's a significant shift because growth stocks have been a crucial driving force behind the continued strength of that 9-1/2-year bull market. Attractive because of their high potential for future returns, growth names like Facebook, Amazon, Netflix, and Alphabet have been downright dominant.
The fact that these stocks are starting to falter is a glaring late-cycle signal for Morgan Stanley, which sees a rotation into unloved names playing out.
The firm surmises that value stocks — or those seen trading at a low price relative to earnings fundamentals — are set for a comeback against their high-growth peers.
Morgan Stanley's thesis is tied back to last week's spike in US bond yields, which has given rise to a broad sell-off across global stock markets. The analysts expect those bond yields to rise further as the Federal Reserve sticks to its interest-rate-hiking path.
The resulting moves will bring "end-of-cycle risks into focus" while also "capping equity market valuations," Morgan Stanley said.
This is a potentially disastrous situation, considering the US economy is running hot after years of monetary stimulus and a boost from the Trump administration's tax cuts. As rates rise and yields climb, that economic growth will be slowed and serious pressure will be placed on the future earnings of market leaders.
And since Morgan Stanley says yields still have further to spike, this dynamic is likely to get more perilous as time progresses.
"The good news is that tech has started to correct in the past month, leaving discretionary and health care as the real outliers now," the equities team said.
And that trend is likely to consolidate as more fund managers rebalance their portfolios away from growth sectors.
"We suspect other asset allocators who have remained overweight US growth equities may now be forced to consider making a switch," the firm said.
By sector, the analysts now favor energy, utilities, and financials over tech and discretionary stocks.
Utilities, which offer a steady return similar to bonds, may look like an odd choice in an era of rising rates, but Morgan Stanley said more defensive stocks might prove their worth once the US economy starts to slow — and that could happen faster than markets expect.
It said US growth was likely to be interrupted by a cyclical bear market as soon as next year, once the boost from President Donald Trump's tax cuts wears off.
"Our concern lies with the fact that 2019 consensus forecasts do not anticipate such a dynamic at all," the analysts said.
As a result, the analysts are more skeptical than the broader market and expect the S&P 500 to remain range-bound between 2,400 and 3,000 for the rest of this year.
Source:BI
Read more:
25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256
World Financial Markets - 0700 17 600 Varchev Exchange - 0700 115 44
Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.
Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006
The information on this site is not intended for distribution or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Disclaimer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.