New York – Morgan Stanley equity strategists have indicated that the current market environment is in a “late cycle” phase, and healthcare stocks stand to benefit due to their defensive and growth attributes.
In a research note led by Michael Wilson, the strategists stated, “We view this year as an extension of the late cycle period often experienced when the Federal Reserve is expected to pause or reverse its hawkish policy stance.”
Despite healthcare’s year-to-date underperformance, with the S&P 500 health sector declining by 2.5% compared to the overall index’s 16.5% gain, the bank’s strategists expressed an “overweight” stance on the sector, considering it a “late cycle outperformer” due to its defensive and growth qualities.
The strategists pointed out, “Earnings revisions are turning higher for the cohort, and valuation remains attractive.”
Their “late cycle playbook” involves adopting a “barbell” portfolio strategy that combines defensive growth on one end and energy and industrials on the other. The latter two sectors tend to benefit during robust economic periods.
In a separate analysis, strategists at BofA Global Research noted that their US Regime Indicator had officially shifted into a “recovery” phase for the economy. Key metrics like inflation and GDP have shown improvements.
Historically, during recovery phases, pro-cyclical sectors such as financials have performed well, while defensive groups like utilities have lagged, according to BofA’s note published on Sunday.
Moreover, recovery phases have witnessed value and higher-risk stocks leading the way, marking a potential reversal from the mega-cap growth leadership seen in 2023, as outlined in BofA’s note.
