Morgan Stanley Investment Management’s Andrew Slimmon points out a notable shift in the market, underscoring the contrast in the performance of the “Magnificent Seven” stocks.
This transition signifies a more selective stance among investors, favoring stocks based on their underlying fundamentals rather than moving collectively.
The remarkable 10.2% rally of the S&P 500 in the initial quarter of 2024, achieving historic highs alongside the Dow Jones Industrial Average and Nasdaq Composite, highlights the evolving nature of the market.
Stocks Cycle Gains Momentum
Slimmon suggests favoring cyclical stocks, highlighting their strong performance lately. The energy, materials, and industrials sectors have been particularly strong, with energy stocks surging by 10.4% in March, materials rising 6.2%, and industrials up by 4.3%.
This trend is fueled by the broader market’s expectation of a smooth transition, shifting attention to sectors known to excel in the early stages of a bull market’s second phase.
Among Slimmon’s recommendations are Applied Materials, Ameriprise Financial, and Valero Energy, all benefiting from the expansion of the U.S. semiconductor industry and government infrastructure spending, leading to substantial gains this year.
Energy Sector Valuation Holds Appeal
Morgan Stanley’s decision to upgrade the energy sector to overweight stems from its compelling valuation and potential for a comeback.
Strategists, led by Michael Wilson, foresee continued outperformance in the energy sector, particularly if companies can deliver on earnings growth.
This optimistic outlook is supported by the sector’s substantial contribution to S&P earnings post-pandemic, despite being among the market’s most under-owned areas.
Although the sector’s performance trailed crude oil prices earlier this year, alignment is expected to improve, with Morgan Stanley projecting Brent to climb to $90 a barrel due to OPEC+ production cuts.
