‘Winter Is Here for Stocks’: Why This Analyst Recommends Defensives

‘Winter Is Here for Stocks’: Why This Analyst Recommends Defensives
A sign for Wall Street hangs in front of the New York Stock Exchange on July 8, 2021. (Mark Lennihan/AP Photo)
Equity markets are going through a lean patch as investors shun risky bets amid the prospect of Fed tightening. An analyst at Morgan Stanley cautions that the downturn may have further legs and recommends investing in defensives.

Attention Turning to Slowing Growth

With the Fed’s pivot now well understood, investor attention now turns to growth, which is slowing and more than expected, Morgan Stanley equity strategist Michael Wilson said in a note.

The current deceleration in growth is more about the “natural ebbing of the cycle” than the latest COVID variant, the analyst said. The slowdown has a bit further to go and equity markets haven’t yet priced for it, he said.

“The winter is here,” Wilson said.

Defensives Over Cyclicals

Against this backdrop, playing defense makes more sense, the analyst said. The fatter pitch now is to be long defensives relative to cyclicals, he added.

The analyst said he continues to like staples over discretionary goods. Demand payback is becoming more evident in the discretionary goods space, and the high prices are continuing to deter investors.

Historically, staples is an outperformer in the macro regime such as the one seen currently, which is characterized by decelerating EPS growth, declining PMIs, and a tightening by the Fed, Wilson said.

Q4 Expectations

On earnings, the analyst said fourth-quarter results will beat estimates by the typical 3 percent to 4 percent The outlook could be more mixed, as companies guide for the full year for the first time, the analyst said.

Thus far, the median company beating earnings expectations traded down 50 basis points, and the median company missing was down 4 percent, he said.

S&P 500 earnings growth is tracking at 23 percent year-over-year, with all sectors but Utilities expected to see positive growth, Wilson said. The biggest contributors to index level earnings growth are expected to be Energy, Industrials, and Tech, with these three sectors likely to contribute more than half of the index’s growth, the analyst said.

By Shanthi Rexaline 
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