Michael Wilson, Morgan Stanley’s chief U.S. equity strategist, says so-called growth stocks will likely remain under pressure after an ugly October saw the shares of popular technology and internet-related companies tumble.
Wilson, in a Sunday note, said growth strategies, which center on investing in companies that consistently grow faster than their peers and the broader market, are experience a slowdown phase compared against shares of companies considered to represent value-based investment strategies.
He wrote:
As we enter November, the good news is that after the last holdouts in US small caps and growth stocks have finally been taken to the woodshed, the rolling bear market arguably has finished its work, or at least the heavy lifting. We concur, but we have no illusions that we’re out of the woods yet on the growth slowdown next year and real earnings risk we have written about.
The hit suffered by growth strategies is underlined by the selloff in so-called FAANG stocks, an acronym for a quintet of large-cap companies made up of Facebook Inc. FB, -1.70% Apple Inc. AAPL, -3.00% Amazon.com Inc. AMZN, -3.46% Netflix Inc. NFLX, -0.55% and Google-parent Alphabet Inc. GOOGL, -3.15% The former high-flyers have seen punishing declines, as investors question the ability of the these companies to generate consistent outperformance in the face of rising interest rates and global economic uncertainty.
Those growth companies have been a part of a group that has helped to lift market sentiment and been the engine that had led to repeated gains in the Dow Jones Industrial Average DJIA, +0.51% S&P 500 index SPX, +0.19% and tech-laden Nasdaq Composite Index COMP, -1.06% until a recent downdraft knocked those benchmarks sharply lower and pushed the Nasdaq into correction territory for the first time in two years.
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Wilson, who had been making ominous calls about the stock market even as benchmarks were recovering from their February corrections, where the S&P 500 and the Dow fell 10% from their late-January peak, says the “heavy lifting” of the market downdraft may be over but another problem could be creeping in: margins.
Here Wilson makes the case that lofty margin expectations for 2019 could be undercut by rising wages, transportation costs and interest rates, with the Federal Reserve widely expected to deliver a fourth rate increase of 2018 in December and hike three more times in 2019, according to data from CME.
In the near term, the Morgan Stanley strategist forecasts big “hard-to-anticipate” intraday swings in the market, with the S&P 500 likely to end the year in a range from 2650-2800, with a base-case target of 2,750, slightly higher than the S&P 500 is currently.
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