Our CIO and Chief U.S. Equity Strategist recaps how equity
markets have fared in 2024, and why they might look more
conservative early in the new year.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan
Stanley’s CIO and Chief US Equity Strategist. Today on the
podcast I’ll be discussing how to position as we head into the
new year.
It's Monday, Dec 16th at 11:30am in New York. So let’s get after
it.
The big question for most investors trying to beat the S&P
500 is whether returns will continue to be dominated by the
Magnificent 7 and a few other high quality large cap stocks or if
we're going to will see a sustainable broadening out of
performance to new areas. Truth be told, 2024 has been a year
during which investors have oscillated between a view of
broadening out or continued narrowing. This preference has
coincided with the ever-changing macro view about growth and
inflation and how the Fed would respond.
To recount this past year, our original framework suggested
investors would have to contend with markets reacting to these
different macro-outcomes. More specifically, whether the economy
would end up in a soft landing, a hard landing or a “no landing”
outcome of accelerating growth and inflation. Getting this view
right helped us navigate what kinds of stocks, sectors and
factors would outperform during the year. The perfect portfolio
this year would have been overweight broad cyclicals like energy,
industrials and financials in the first quarter, followed by a
Magnificent 7 tilt in early 2Q that got more defensive over the
summer before shifting back toward high quality cyclicals in late
third quarter. Lately, that cyclical tilt has included some lower
quality stocks while the Magnificent 7 has had a big resurgence
in the past few weeks. We attributed these shifts to the changing
perceptions on the macro which have been more uncertain than
normal.
Going into next year, I think this pattern continues, and it
currently makes sense to have a barbell of large cap high quality
cyclicals and growth stocks even though small caps and the
biggest losers of the prior year tend to outperform in January as
portfolios rebalance. We remain up the quality curve because it
appears the seasonal low quality cyclical small cap rally was
pulled forward this year due to the decisive election outcome. In
addition to the large hedges being removed, there was also a
spike in many confidence surveys which further spilled into
excitement about this small cap lower quality rotation.
Therefore, it makes sense that the short-term euphoria that's now
taking a break with the rotation back toward large cap quality
mentioned earlier. The fundamental driver of this rotation is
earnings. Both earnings revisions and the expected growth rate of
earnings next year remain much better for higher quality stocks
and sectors. Given the uncertainty around policy sequencing and
implementation on tariffs, immigration and how much the Fed can
cut rates next year, we suspect equity markets will tread a bit
more conservatively in the first quarter than what we observed
this fall.
The biggest risks to the upside would be a more modest
implementation of tariffs, a de-emphasis on deportations of
working illegal immigrants and perhaps more aggressive
de-regulation that is viewed as pro-growth. Other variables worth
watching closely include how quickly and aggressively the new
department of government efficiency acts with respect to
shrinking the size of the Federal agencies. While I'm hopeful
this new effort can prove the skeptics wrong, success may prove
to be growth negative in the near term given how much the
government has been driving overall GDP growth for the past few
years. In my view, a true broadening out of the economy and the
stock market is contingent on a smaller government both in terms
of regulation and absolute size. In my view, this is the most
exciting potential change for taxpayers, smaller businesses and
markets overall. However, it is also likely to take several years
to fully manifest.
In the meantime, I wish you a happy holiday season and a healthy
and prosperous New Year.
Thanks for listening. If you enjoy the podcast, leave us a review
wherever you listen, and share Thoughts on the Market with a
friend or colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.