Michael Wilson, Chief Strategist at Morgan Stanley: U.S. stocks show strong resilience, recommends investing in high-quality growth stocks and large-cap companies.

Morgan Stanley's chief strategist Mike Wilson is optimistic about U.S. stocks, despite their underperformance compared to international markets since 2015. He believes that large U.S. companies and high-quality growth stocks are resilient in a post-cycle economy, supported by the depreciating dollar, stable corporate earnings, and improvements in trade agreements with China. If the Federal Reserve adopts a dovish stance and the 10-year U.S. Treasury yield falls below 4%, it could boost the S&P 500 index. Wilson also favors healthcare and industrial stocks and has increased the target price for Tenet Healthcare to $175.

U.S. Stocks Lag Behind International Markets, Wilson Stays Optimistic

According to Dow Jones, as of early May 2025, the S&P 500 index has risen for nine consecutive days but is still down 3% since the start of the year. In contrast, the iShares MSCI EAFE ETF (ticker: EFA), which tracks large companies in Europe, Australia, and the Far East, has risen 14%. In this context, Wilson's perspective is particularly noteworthy. He points out that many investors are focused on whether the U.S. stock market has lost its "exceptional status," but he believes this is the wrong direction for discussion.

"Our conversations with investors show that the market is overly focused on structural issues, while the current challenges are more cyclical," Wilson stated. He believes that U.S. companies still have an advantage in the late economic cycle, especially those growth companies with high-quality traits.

Investment Strategy in the Late Economic Cycle: Focus on Large Caps and High-Quality Companies

Wilson points out that the U.S. economy is currently in the late stage of the economic cycle, characterized by a slowdown in the overall economy, the Federal Reserve maintaining interest rates, and long-term interest rates remaining high. In such an environment, he believes high-quality growth stocks will more easily attract market attention.

"This is a time when high-quality growth stocks typically get rewarded because the momentum of the economic cycle has slowed," Wilson said. He noted that the proportion of high-quality growth stocks is higher in the U.S. large-cap indices, and these companies have lower earnings growth volatility, providing stability in uncertain environments.

Additionally, the recent depreciation of the dollar has been beneficial for U.S. companies. According to Bloomberg, the dollar index has fallen 5.5% since the beginning of the year, reflecting market concerns about the U.S. economic and policy outlook. Wilson believes that a weaker dollar helps enhance U.S. export competitiveness and reduces pressure from international competitors.

Industry Preferences: Healthcare and Industrials Lead

Regarding industry allocation, Wilson and his team show clear preferences. They tend to favor:

• Large companies over small companies;
• In defensive stocks, preferring healthcare over consumer staples;
• In cyclical stocks, favoring industrials over consumer discretionary.

Moreover, they particularly value companies with strong financial and operational quality, preferring those with low leverage ratios, high operational efficiency, stable profit flows, and low profit margin volatility.

Technical Observations: S&P 500 Faces Critical Threshold

Since the U.S. stock market began rebounding a month ago, Wilson notes that the S&P 500 index is approaching a critical technical test range—5,750 to 5,800 points, where the 100-day and 200-day moving averages converge. He states that breaking through this range could potentially start a new upward trend.

Wilson lists four conditions as the basis for judging whether the stock market rebound is sustainable, two of which have been met:

1. The outlook for a China trade agreement has turned optimistic;
2. Earnings revisions in technology and other high-growth industries have stabilized.

The remaining two unmet conditions are:

3. The Federal Reserve shifts to a more dovish monetary policy;
4. The 10-year U.S. Treasury yield falls below 4%.

According to Saxo Bank data, as of May 2, the 10-year U.S. Treasury yield is 4.31%, still above Wilson's threshold.

International Capital Flows and Dollar Trends

The recent weakening of the dollar has also triggered a reallocation of international capital. According to Yahoo Finance, Asian currencies have generally appreciated, with the New Taiwan dollar appreciating by 9.22% against the dollar and the Korean won by 5.44%. This trend reflects a decline in investor confidence in dollar assets and may prompt capital to flow back into the U.S. stock market in search of stable returns.

Morgan Stanley's strategy team points out that large companies with pricing power, supply chain flexibility, and currency hedging strategies will be better equipped to handle the challenges posed by trade policies and exchange rate fluctuations.

Industry and Company Examples: Healthcare Stocks Favored

In terms of specific companies, Morgan Stanley recently raised the target price for Tenet Healthcare from $165 to $175 and maintained an "Overweight" rating. The company's first-quarter financial report showed adjusted earnings per share of $4.36, exceeding the market expectation of $3.12, reflecting its advantages in cost control and operational efficiency.

This also echoes Wilson's preference for healthcare stocks, believing they achieve a good balance between defensiveness and growth, making them particularly suitable for the current market environment.

References

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