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Morgan Stanley says its positioning in financial stocks is light compared to other sectors.
We believe the group is undervalued due to its exposure to economic power.
Investors are sticking to defensive stocks and blue-chip stocks despite the positive data.
Morgan Stanley said investors were stuck in defensive trades that didn’t take advantage of the strength of the economy, highlighting opportunities in under-invested sectors.
The firm just last week upgraded cyclical stocks to “overweight” relative to defensive stocks, but said the financial group was particularly attractive.
According to Morgan Stanley, its net exposure to the financial sector ranks in the bottom 15th percentile of its historical data series dating back to 2010. Additionally, as the graph below shows, the financial sector has the least amount of holdings of any sector.
morgan stanley
But Mike Wilson, the bank’s chief investment officer and chief U.S. equity strategist, sees a potential confluence of headwinds pushing financial stocks higher.
“In our view, this was an overweight move last week, given the recovery in capital market activity, an improved lending growth environment in 2025, accelerated share buybacks following late Basel reproposals, and attractive relative investments. We believe this will create opportunities for the financial sector, which has been upgraded to a “rating”,” he wrote.
Bank stocks also have more attractive valuations after de-risking last month as large-cap dealers expressed caution about the business environment. Morgan Stanley said the weakness has lowered investors’ expectations for earnings season, making it easier for large financial institutions to beat expectations.
JPMorgan and Wells Fargo have soared since reporting better-than-expected earnings last week, rising 3.8% and 8.8%, respectively, since Friday’s open.
Despite this, Wilson found that the market’s appetite for finance was not being realized. This isn’t just limited to bank stocks, as investors are concentrating their exposure to defensive and blue-chip stocks while ignoring other cyclical sectors.
Utilities, healthcare, and real estate play a defensive role and are among the four sectors with high net exposure.
Wilson argued that this shows investors are still looking at a low-growth scenario, but that seems unlikely given recent macroeconomic developments.
Morgan Stanley moved to neutral on cyclicals and defensive stocks at the end of last month, but upgraded cyclical stocks to overweight last week after September’s employment report came in much better than Wall Street expected. did.
“Business cycle indicators are starting to show relative strength, as several key macro indicators (i.e. jobs and ISM services) came out better than expected following the Fed’s 50bp rate cut,” Wilson said. Ta.
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At the same time, interest rate market yields are trending higher, indicating that growth concerns are receding.
The memo said cyclical stocks such as industrials, financials and energy rise as yields rise, while defensive stocks are negatively correlated with rising interest rates.
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