By Lewis Krauskopf
NEW YORK (Reuters) – Morgan Stanley equity strategists said on Monday that markets are in a “late cycle” environment, with healthcare stocks poised to benefit because they have both defensive and growth properties.
“We view this year as an extension of the late cycle period often experienced when the (Federal Reserve) is expected to pause or reverse its hawkish policy stance,” strategists led by Michael Wilson said in a research note.
Morgan Stanley noted that healthcare has underperformed; the S&P 500 health sector is down 2.5% year-to-date versus a 16.5% rise for the overall index.
But the bank’s strategists said they were “overweight” the sector, calling it a “late cycle outperformer given its defensive and growth properties.”
“Earnings revisions are turning higher for the cohort and valuation remains attractive,” the strategists wrote.
Overall, the strategists’ “late cycle playbook” included a “barbell” portfolio approach with defensive growth on one side and energy and industrials – two areas that tend to benefit in strong economies – on the other.
Separately, strategists at BofA Global Research said their US Regime Indicator officially switched to a “recovery” phase for the economy, with metrics such as inflation and GDP improving.
Previous recovery regimes have seen pro-cyclical areas such as financials fare well, while utilities and other defensive groups lagged, BofA said in a note on Sunday.
Meanwhile, the recovery phase has also seen value and higher risk stocks lead, BofA wrote.
“These would mark a reversal of 2023’s mega-cap growth leadership,” BofA said in the note.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Richard Chang)
