Investors should consider taking profits on their US defensive stocks as valuations are becoming expensive, according to Morgan Stanley strategists. While defensive stocks have outperformed in recent months, the team led by Michael Wilson believes it is wise to lock in gains until there is more clarity on upcoming jobs data, which they view as a crucial factor for stocks going forward.
In the midst of concerns about a potential recession in the US, investors have gravitated towards defensive sectors like healthcare and utilities. A basket of defensive stocks put together by Citigroup Inc. has seen an 11% increase since the end of June, surpassing the 8.5% growth seen in cyclical sectors.
The recent Federal Reserve interest rate cut, the first in four years, has helped ease worries about economic growth. Following the decision, the S&P 500 Index reached a record high and market participants are anticipating more easing measures before the year ends.
Typically, defensive stocks see a slight underperformance in the month following a rate cut by the Fed, but Morgan Stanley’s team anticipates a persistent outperformance over the next three to twelve months. Wilson, who was bearish on stocks until mid-2024, continues to favor large-cap stocks with strong earnings potential.
While some market strategists at Citigroup and Barclays have become more optimistic about cyclical sectors, particularly in Europe, there are still concerns about the outlook. JPMorgan Chase & Co. strategist Mislav Matejka remains bearish on European cyclical stocks due to anticipated declines in bond yields, earnings revisions, and unattractive valuations.
For investors considering their next moves in the market, it is crucial to weigh the potential risks and rewards of both defensive and cyclical stocks in the current economic climate. Stay informed on market trends and economic indicators to make well-informed decisions for your investment portfolio.
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