Morgan Stanley identifies 28 underappreciated, high-quality stocks to own as the markets most expensive names are due to continue underperforming
Summary List Placement Investors last year piled into growth stocks amid the low interest rate environment. The insatiable demand for the names drove up some valuations to neck-straining heights, and pushed the gap between growth and cheaper value names towards its widest ever . But investor flows have changed this year, with money coming out of the most expensive names and pouring into more cyclical stocks as markets digest rising rates and a clearer path to an economic recovery. According to Morgan Stanley ''s Chief US Equity Strategist Mike Wilson , this shift out of expensive names is bound to continue in the months ahead as friendly monetary policy hits its top. The breadth and pace of upwards earnings revisions are also set to begin falling, a bad sign for highly valued names and the market more broadly. This is because weaker earnings make it difficult to continue justifying steep valuations. Wilson said this makes the market "vulnerable" to a 10-15% correction in the next six months. "Much of our mid-cycle transition call is based on the arrival of the peak rate of change in both growth and policy," Wilson said in note to clients on Monday. "The adjustment for markets means lower valuations, a process that began in 1Q for the most expensive stocks. "We think that de-rating will now broaden out, which means investors must find stocks where expectations can still rise more than P|Es fall, or about 15% in our view," he added.
Morgan Stanley identifies 28 underappreciated, high-quality stocks to own as the markets most expensive names are due to continue underperforming
Summary List Placement Investors last year piled into growth stocks amid the low interest rate environment. The insatiable demand for the names drove up some valuations to neck-straining heights, and pushed the gap between growth and cheaper value names towards its widest ever . But investor flows have changed this year, with money coming out of the most expensive names and pouring into more cyclical stocks as markets digest rising rates and a clearer path to an economic recovery. According to Morgan Stanley ''s Chief US Equity Strategist Mike Wilson , this shift out of expensive names is bound to continue in the months ahead as friendly monetary policy hits its top. The breadth and pace of upwards earnings revisions are also set to begin falling, a bad sign for highly valued names and the market more broadly. This is because weaker earnings make it difficult to continue justifying steep valuations. Wilson said this makes the market "vulnerable" to a 10-15% correction in the next six months. "Much of our mid-cycle transition call is based on the arrival of the peak rate of change in both growth and policy," Wilson said in note to clients on Monday. "The adjustment for markets means lower valuations, a process that began in 1Q for the most expensive stocks. "We think that de-rating will now broaden out, which means investors must find stocks where expectations can still rise more than P|Es fall, or about 15% in our view," he added.