Analysts at Morgan Stanley believe that targeting high-quality stocks (quality bias) will continue to be a successful investment strategy.
They point to mixed economic data: positive signs in consumer spending and the services sector, but also concerns about inflation.
This uncertainty, according to Morgan Stanley, strengthens their view in favor of “quality growth and quality cyclicals with some defensive weighting.”
The note highlights the underperformance of small-cap stocks relative to their large-cap peers. Morgan Stanley believes that small-caps are more sensitive to interest rates, and while higher rates are a clear negative, they do not see a significant benefit for small-caps from a potential rate cut. This is the main reason why they prefer large-cap stocks.
Encouragingly, Morgan Stanley is seeing earnings growth re-accelerating, especially among high-quality large-cap stocks. This trend, following a period of stagnation, coincides with the recent easing of financial conditions and revised expectations of slower growth.
As the economic outlook remains unclear, Morgan Stanley advises investors to remain “biased on the quality of large cap investments.” This strategy includes exposure to various segments of the market, including growth stocks, cyclicals and defensive plays, to navigate the uncertain late-cycle environment.