Morgan Stanley Strategist Advocates Defensive Stance As Market Dynamics Shift

Morgan Stanley equity strategist Michael Wilson has a cautious outlook for the U.S. stock market, underlining a preference for defensive sectors.

In a note released Monday, Sept. 25, Wilson pointed to the resurgence of defensive sectors’ outperformance, while cyclicals and growth sectors have recently faced headwinds.

This caution stems from weakening momentum in discretionary spending, with consumers depleting their pandemic savings buffers and facing the impact of rising interest rates.

Utilities, Health Care, and Consumer Staples have caught the analyst’s attention due to their compelling valuations.

Wilson highlighted that Utilities trade at an attractive forward price-to-earnings ratio of around 16 times, while Consumer Staples is at a ratio of approximately 19 times.

ETF	P/E Ratio 12M Forward	YTD Performance
Communication Services Select Sector SPDR Fund XLC	14.9x	37.68%
Technology Select Sector SPDR Fund XLK	24.6x	32.97%
Consumer Discretionary Select Sector SPDR Fund XLY	22.8x	25.45%
SPDR S&P 500 ETF Trust SPY	18.8x	13.80%
Industrials Select Sector SPDR Fund XLI	18.1x	4.91%
Energy Select Sector SPDR Fund XLE	11.8x	4.85%
Materials Select Sector SPDR Fund XLB	17.8x	2.32%
Financial Select Sector SPDR Fund XLF	13.7x	-0.20%
Health Care Select Sector SPDR Fund XLV	17.2x	-3.03%
Real Estate Select Sector SPDR Fund XLRE	32.9x	-4.06%
Consumer Staples Select Sector SPDR Fund XLP	18.9x	-4.15%
Utilities Select Sector SPDR Fund XLU	16.2x	-8.10%

Consumer Discretionary, Tech Cyclicals Under Pressure

In contrast, Wilson recommends investors to stay underweight in the Consumer Discretionary and Tech sectors.

Wilson points to multiple factors putting pressure on the Consumer Discretionary sector, including slowing consumer spending, the resumption of student loan payments, rising delinquencies in certain household cohorts, higher gas prices, and concerning data from the housing sector.

Although Tech and Consumer Discretionary have secured the second and third spots for the best-performing sectors year to date, Wilson emphasized the current fragility of market breadth.

Only about 30% of stocks have outperformed the S&P 500 year-to-date, and just half of the stocks in the index are in positive territory for the year.

S&P 500 Outlook

Wilson maintains a bearish stance on the stock market throughout 2023, which has so far proven to be inaccurate.

Read Also: ‘We Were Wrong’ – Bearish Morgan Stanley Strategist Waves White Flag To Market Rally, But Points To Possible Headwind For 2nd Half

Despite this, the investment bank still maintains a pessimistic one-year price projection for the S&P 500 Index.

Under the baseline scenario, the firm expects the index to decline to 4,200 points, representing a 7% decrease from current levels. In the most pessimistic scenario, the S&P 500 could tumble by as much as 18% over the next year, while the most optimistic projection suggests a modest 4% gain.

Now Read: Fund Managers Lag S&P 500 As 60% Underperform In First Half Of 2023: Here’s Why