US stocks may experience a significant boost as a shift towards cyclical and economically-sensitive industries gains traction, according to strategists at Morgan Stanley. The analysis, led by Michael Wilson, highlights reports of increased traffic through the strategically important Strait of Hormuz, coupled with indications that factors such as interest rates, oil prices, and the strength of the dollar exerting pressure on equities might be easing.
This shift could potentially pave the way for undervalued stocks to take center stage in a market previously dominated by high-growth technology sectors. Wilson remains optimistic about cyclical sectors, including consumer discretionary, transportation, and regional banks, emphasizing that current investor sentiment remains “bearish and muted” despite recent outperformance relative to the S&P 500.
Recent hopes for a viable US-Iran agreement have contributed to a more positive risk sentiment, with the S&P 500 hovering just 2% shy of its all-time high. Analysts are largely anticipating renewed momentum in a global equity rally, which could particularly benefit European markets where cyclical industries are prominent. Furthermore, a decline in energy prices would help alleviate inflation concerns, potentially lowering the urgency for the Federal Reserve to hike interest rates.
Echoing Morgan Stanley’s bullish outlook, JPMorgan Chase & Co.’s global equity strategist Mislav Matejka noted that the rotation into cyclical stocks is poised to remain a successful strategy through the end of the year, provided there is a stabilization in earnings and inflation, along with a reduction in geopolitical tensions.
In the meantime, at Deutsche Bank AG, head of European equity strategy Maximilian Uleer has opted to recalibrate his stance, closing a position that favored US stocks over European equities. He cautioned that key drivers for US stock outperformance—such as leadership from the technology sector and strong earnings growth—may start to wane.
Wilson commented on the recent dip in US equities, particularly those in the memory-chip sector, attributing it to a moderation in earnings momentum rather than any deterioration in underlying fundamentals. He maintained that such fluctuations are typical in earnings-driven bull markets, particularly after periods of pronounced growth.
“While we might see some more choppiness in coming weeks, our conviction in the current bull market is intact,” Wilson asserted, reassuring investors about the resilience of the market in face of potential volatility.
