Nikada/E+ via Getty Images
Morgan Stanley Wealth Management has a few suggestions on where investors could play defense in a U.S. equity market coming out of a strong H1 2024 dominated by narrow leadership in mega-cap technology stocks.
Investors in H2 have a “complicated choice” of whether to embrace market leadership despite stretched momentum, or to aim for some defense in the face of monetary policy and global political uncertainty, Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note Monday. The S&P 500 (SP500)(SPY)(IVV) climbed ~15% in the first six months of the year. But the index is showing signs of “technical fragility,” including breadth deterioration, and potential profit struggles for the vast majority of its constituents, she said.
Shalett said investors should consider focusing on U.S. stock portfolio defense on “pockets that contain growth at a reasonable price,” such as in health care (XLV), industrials (XLI), aerospace/defense, select power generation/grid infrastructure, financials (XLF) and residential REITs. She also recommended overweighting Japan equities (NKY:IND), gold (XAUUSD:CUR) hedge funds and investment-grade credit.
“Typical safe havens like U.S. Treasuries (US10Y) and the dollar (DXY) may be ineffective in upcoming months amid Fed rate cuts,” Shalett said. “Meanwhile, traditionally defensive sectors like consumer staples (XLP) may face other headwinds, such as deflation and demand reduction, while utilities (XLU) and REITs are no longer monolithic sectors easy to passively own,” she said.
She also said earnings forecasts for many defensive areas remain back-end loaded, requiring dependence on margin expansion.
Consumer staples (XLP) companies are facing “consumer revolt” following the inflation surge, as well as a possible structural demand downshift as people adopt GLP-1 weight-loss drugs, she said. Meanwhile, passive, top-down approaches to REITs and utilities miss key structural shifts include differentiation between commercial and residential real estate or between clean power grid upgrades and regulated pricing regimes, she said.
There’s also risk in embracing market leadership, stemming from valuations, she said. Also, there’s “the reality that ‘Mag 7’ earnings growth is poised for radical deceleration, narrowing the profit-growth dispersion that has underpinned outperformance,” Shalett said, referring to the Magnificent 7 group of mega-cap tech stocks: (AAPL), (AMZN), (GOOG), (NVDA), (META), (MSFT) and Tesla (TSLA).
