Strong jobs report to lift cyclical stocks, says Morgan Stanley

investing.com 07/10/2024 - 11:59 AM

Morgan Stanley Shifts Outlook on Cyclical Stocks

Investing.com — Analysts at Morgan Stanley recommend shifting towards cyclical stocks following resilient US labor market data and expectations of Federal Reserve interest rate cuts.

In a note to clients on Monday, the analysts noted increased investor confidence that the Fed will manage a “soft landing,” enabling elevated inflation to be addressed without a downturn in the broader economy or employment demand.

Cyclical stocks, known for their volatility and correlation with economic trends, are expected to outperform as a result. Businesses like airlines and automakers, which provide discretionary goods or services, fall under this category.

The outlook for cyclical stocks has been upgraded to “Overweight” as opposed to defensive stocks, which maintain profitability regardless of economic conditions.

Sector upgrades include financials to “Overweight” while downgrades for healthcare and staples moved to “Neutral” and “Underweight,” respectively. Analysts retain an Overweight position in utilities as a defensive hedge with secular growth exposure.

Recent reports indicated the US economy added 254,000 jobs in September, up from 159,000 in August. The unemployment rate decreased to 4.1%, while average hourly wages increased by 0.4% month-over-month.

Major indices showed positive trends, with the Dow Jones Industrial Average hitting a record close, the Nasdaq Composite rising by 1.2%, and the S&P 500 increasing by 0.9%.

Predictions for a drastic interest rate cut have diminished, with a 94.5% chance that the Fed will implement a quarter-point reduction instead of a substantial cut, according to the CME Group’s FedWatch Tool.




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