U.S. ‘soft landing’ scenario could boost healthcare, industrials shares -MS strategists

By Lewis Krauskopf

NEW YORK (Reuters) – A “soft landing” economic scenario in the United States could boost an array of stocks ranging from healthcare to industrials to small-cap shares, depending on how strong growth is, Morgan Stanley strategists said in a note on Monday.

Most market participants and macro forecasters expect a soft landing for 2024, which involves muted economic growth, falling inflation and more accommodative monetary policy from the Federal Reserve, the Morgan Stanley equity strategists led by Michael Wilson said.

In such a scenario, the strategists expect strength with “defensive growth” shares including healthcare and late-cycle cyclicals such as industrials. Large-cap quality stocks also would be expected to outperform, the note said.

In a soft-landing scenario that is accompanied by an acceleration in nominal growth, which the strategists said would likely be a “constructive outcome for risk assets broadly,” they see small caps, cyclicals and economically-sensitive industries, such as transports and banks leading the way.

Investors are still assigning a roughly 30% probability to a “hard landing” for the economy, the strategists said.

In that event, traditional defensive areas would shine, including healthcare, utilities and consumer staples, while large caps would likely outperform small caps, the strategists said.

Overall, following the end-of-year rally in 2023, growth likely will need to pick up while interest rates remain calm for stock prices to move “materially higher”, according to the note.

“We think 2024 will be another year of twists and turns with the consensus view on key macro variables/outcomes shifting back and forth,” the Morgan Stanley strategists said. “This suggests a trading range until the outcome is more definitive.”

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