Investors who are unsure about where the U.S. economy stands in the current business cycle should concentrate on late-cycle stock sectors, particularly one that has been performing well recently. Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, advises clients to stick with the late-cycle playbook until more definitive data becomes available. According to Wilson, markets will also behave in a late-cycle manner.
Wilson suggests that investors hold a “barbell portfolio” consisting of defensive growth stocks on one side (such as healthcare and consumer staples) and late-cycle cyclicals on the other (such as industrials and energy). He believes it is too early to pivot when it comes to investing in small to mid-cap stocks, even though they have underperformed this year.
Within the cyclicals, Wilson recommends the energy sector, which has gained attention recently due to rising crude oil prices. Wilson states that historically, the energy sector outperforms in late-cycle environments when commodity prices are strong. The sector currently benefits from strong oil demand, significant production cuts, and stable crude prices, according to Wilson.
Wilson highlighted several reasons why the energy sector is attractive, including its recent underperformance, attractive valuations, accelerated earnings revisions, and low exposure levels of hedge funds to the sector.
In addition to the energy sector, Wilson also provided a list of defensive growth stocks that have outperformed this year. These stocks, rated overweight by Morgan Stanley, include Accenture, Apple, AutoZone, Biomarin Pharmaceutical, and Boston Scientific.
Wilson acknowledged that most U.S. investors expect large-cap winners to continue leading in the fourth quarter if the broader market remains stable. However, he warns that it may be too early for markets to pivot and broaden out to areas that have underperformed year to date, such as value and small/mid-cap stocks.