Morgan Stanley says go long quality growth over lower quality cyclicals

Morgan Stanley's Michael Wilson suggests that current equity prices largely reflect the Federal Reserve's dovish stance, raising questions about whether this will translate into economic growth.

In a note sent to broker’s clients on Sunday, Wilson emphasized the significance of macroeconomic factors in determining the trajectory of average stock prices, even as stock picking remains important.

The data indicates a directional slowdown in both growth and inflation, prompting expectations of Fed easing in the coming year. Wilson observes that in such conditions, quality growth tends to outperform.

The late 2023 rally in lower-quality cyclicals, he notes, was driven more by short-covering and year-end performance-chasing than by a sustainable shift in leadership based on a comprehensive cycle reset.

Morgan Stanley analysts also see the potential for double-digit relative outperformance of quality growth over lower-quality cyclicals. Relative earnings revisions for quality growth stocks have turned upward, indicating a possible catch-up in relative performance.

Among the high-quality growth stocks with overweight ratings from Morgan Stanley analysts, Wilson's list includes Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), Palo Alto Networks (NASDAQ: PANW), Salesforce (NYSE: CRM), and Nvidia (NASDAQ: NVDA).

By Senad Karaahmetovic

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