These stocks could rally in ‘second phase’ of bull market, Morgan Stanley Investment Management says
There’s a rotation happening in the market that investors can take advantage of by investing in cyclical stocks, according to Morgan Stanley Investment Management’s Andrew Slimmon. “Not all ‘Mag 7’ stocks are moving all together, and that’s because some of the fundamentals have bifurcated. …That’s a healthy sign that people are actually picking winners and picking losers,” said the firm’s senior portfolio manager, referring to the so-called Magnificent Seven stocks that have driven stocks higher over the past year. “The market has moved on and found new things to be interested in.” Stocks kicked off the year on a tear, with the S & P 500 surging 10.2% in the first three months of 2024. The broad market index also reached record levels, along with the Dow Jones Industrial Average and Nasdaq Composite. .SPX YTD mountain SPX in 2024 Although Slimmon expects a pullback to happen this summer due to persistent inflation, he said that it should be a time for investors to dig their heels deeper into the market—not shy away. He recommended investors to have a more cyclical bias to their portfolio, pointing out that the best-performing sectors in the last month are energy, materials and industrials. The energy sector jumped 10.4% in March, while materials climbed 6.2%, and industrials added 4.3%. He also thinks there’s still room to run in semiconductor stocks — even if the overbought group sees a near-term pullback. ” Because the consensus has moved to a soft landing, you’re seeing other parts of the market respond and that’s a very good sign,” Slimmon said, referring to the rotation into cyclical stocks. “If the economy was about to really slow down, you wouldn’t see leadership in those areas … we’re in the earlier part of the second phase of a bull market.” Slimmon named Applied Materials , Ameriprise Financial and Valero Energy as some of the stocks he likes right now. Applied Materials, which manufactures semiconductor equipment, should benefit from the increased buildout of the U.S. semiconductor industry, Infrastructure Investment and Jobs Act and post-Covid government spending on infrastructure, according to the portfolio manager. Industrial name United Rentals and cement company CRH are other beneficiaries of fiscal policy spending on infrastructure, he said. Applied Materials shares have jumped more than 27% this year amid the AI-fueled hype around semi and tech stocks, while CRH and United Rentals have each jumped about 25%. Ameriprise Financial is one of Slimmon’s favored picks within financials. That’s a sector the portfolio manager likes because of the “very high level of money that’s sitting in money markets” after last year’s rally that he expects to flow into other assets — such as stocks and bonds. Shares of Ameriprise have added 15.4% this year and 45.4% over the past 12 months. Regarding energy, Slimmon said the space could continue to show strength if the economy begins to weaken. He highlighted petroleum refinery Valero Energy as a strong pick that still has room to run, saying refineries benefit from higher prices and stalled oil refining capacity in the U.S. The stock has gained 31% in 2024.
