- Morgan Stanley’s Mike Wilson says we’re entering mid-cycle stock market dynamics.
- He’s recommending investors move into higher quality stocks.
- The call comes a year after Wilson advocated for stepping into cyclical stocks.
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After the stock market bottomed last March, Morgan Stanley’s Mike Wilson began to advocate for investors to step into cyclical stocks in anticipation of an economic recovery.
Those who took that advice would have benefitted handsomely, especially towards the end of 2020 and the beginning of 2021, when pharmaceuticals discovered vaccines and Democrats took control of the White House and Senate.
Now, a year later, Wilson is starting to call an end to this rotation and to early cycle plays. From the market’s point of view, we’re beginning to enter the mid-cycle period of the economic rebound, he said in a Monday note to clients, meaning steadier but slower growth. This is when investors ought to look to more reliable stocks with strong earnings, he said.
This is because prices for firms are getting set to surge as supply shortages begin to appear, Wilson said, which could mean reduced demand and profit margins.
“We continue to hear anecdotal evidence that costs are rising for many key inputs for companies — materials, logistics, labor, etc. Last week’s Manufacturing PMIs shed further light on how acute these cost pressures may become over the next few months,” Wilson wrote.
“While we may be a little early, we believe now is the time to shift one’s portfolio up the quality curve while
remains flush and before these supply/margin issues become more obvious,” he added.
The below chart shows the drop in manufacturing Wilson expects to come in the next 12 months as prices turn a corner upwards. The extreme dichotomy between the manufacturing prices and manufacturing output resembles prior mid-cycle instances, which are circled in red.
To find the best opportunities in individual stocks while considering these dynamics, Wilson and his team screened for high quality, defensive names whose earnings revisions have been better than the average for the Russell 1000 index in the last month.
Twenty-five met their criteria, and are listed below by their market sectors.