The bank identified 15 major stocks that fit its quality criteria and carry an “overweight” rating from its analysts, including chipmakers Nvidia (NASDAQ: NVDA) and Micron Technology (NASDAQ: MU), tech companies Apple (NASDAQ: AAPL) and SanDisk (NASDAQ: SNDK) and credit giants Visa (NYSE: V) and Mastercard (NYSE: MA).
The rest of the list spans several sectors, including consumer staples, retail, health care, technology, semiconductor equipment, software and travel.
Among them are Costco (NASDAQ: COST), Coca-Cola (NYSE: KO), Lam Research (NASDAQ: LRCX), Arista Networks (NYSE: ANET), Gilead Sciences (NASDAQ: GILD), Seagate Technology (NASDAQ: STX) and Booking Holdings (NASDAQ: BKNG), along with the beaten-down UnitedHealth (NYSE: UNH) and ServiceNow (NYSE: NOW), which was caught up in the broader software selloff earlier this year.
To make the cut, companies had to rank among the 1,000 largest stocks by market value, have higher earnings estimates than three months ago, place in the top third of Morgan Stanley’s quality screen and carry an “overweight” rating from the bank’s analysts.
What changes in mid-cycle
The focus on earnings reflects Morgan Stanley’s broader view of where the market is headed. The bank believes that the bull market still has room to run, but the companies leading it could change as the economic cycle matures. Wilson has previously described a shift away from the early-cycle environment, when economically sensitive, higher-risk companies benefited as earnings rebounded from depressed levels.
In the mid-cycle phase, strong earnings growth becomes more important as higher interest rates weigh on stock valuations. Wilson has pointed to the current combination of strong earnings growth and declining valuations as a sign that this shift is already underway.
During mid-cycle, “quality starts to matter again,” Wilson said in an Aug. 3 episode of the Thoughts on the Market podcast. In a follow-up podcast on Sept. 18, he pointed to strengthening earnings expectations in software, financial services, insurance and health care services, suggesting those sectors could pick up some of the momentum enjoyed by semiconductors and other cyclical stocks earlier this year.
There are signs that shift may already be underway. The Philadelphia Semiconductor Index, a widely followed benchmark for the chip industry, has surged 75% this year but is down roughly 14% from its June high, according to Yahoo Finance data.
For investors, a shift in market leadership would put more weight on companies that can keep growing earnings and generating cash even as borrowing costs rise.
