As attention shifts to the upcoming presidential election, Morgan Stanley asserts that the business cycle will play a more crucial role in stock selection. The recent rise in yields, prompted by positive economic data, such as last week’s wholesale inflation report, suggests that the bond market is easing some growth concerns, hoping for a stable economic foundation. Equity strategist Michael Wilson conveyed in a research note that this development boosts confidence in cyclical stocks, which are positively linked to increases in the 10-year Treasury yield. Wilson anticipates that both interest rates and economic data will favor cyclical stocks, which are also expected to gain from a rebound in capital market activity, an enhanced lending environment, and a rise in stock buybacks.
This perspective is shared as the S&P 500 recently reached a new record high, buoyed by unexpectedly strong third-quarter results from several companies. Investor sentiment remains optimistic, with expectations that this week’s earnings reports will continue to exceed projections. Morgan Stanley has identified several cyclical stocks to monitor, all rated as overweight by the firm.
Notably, Nvidia is among these stocks, having seen a share price increase of over 178% in 2024. The company has benefited from strong demand for artificial intelligence applications, driving significant investment in its GPUs. Goldman Sachs analyst Toshiya Hari raised the price target for Nvidia, expressing optimism about its potential to capture more business from AI inference.
Wells Fargo is another stock highlighted by Morgan Stanley. Its shares have risen more than 27% in 2024. Despite a reduction in net interest income, Wells Fargo’s better-than-expected third-quarter earnings propelled its stock higher. The company also repurchased $3.5 billion in stock during the quarter, a 60% increase from the previous year. Barclays analyst Jason Goldberg believes Wells Fargo stands to benefit from higher interest rates and has enhanced its control functions. The potential lifting of regulatory restrictions is also seen as a positive prospect for the stock.
Other notable stocks on Morgan Stanley’s watchlist include Alphabet, Google’s parent company, and the delivery service DoorDash.