Despite recent volatility and underperformance, Wall Street investment bank Morgan Stanley (MS) remains bullish on U.S. stocks.
Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, says a weaker dollar will improve the earnings of U.S. companies and is likely to lead to American equities once again outperforming their international peers.
The bullish note comes as the benchmark S&P 500 index fell into a technical correction earlier in March, declining more than 10% from its recent highs.
While U.S. markets have staged a modest recovery over the past week, they continue to lag European markets.
The S&P 500 index in the U.S. is currently down 3.6% this year compared with a gain of more than 8% for the pan-European Stoxx 600 index.
However, in a note to clients, Wilson urges investors not to bet against U.S. equities, saying they could quickly bounce back in the “near-to-intermediate term.”
Morgan Stanley’s outlook is one of the most positive on Wall Street currently.
A recent Bank of America (BAC) survey found that investors have slashed their holdings of U.S. stocks by the most on record while piling into European equities instead.
Underlying this rotation has been a weak outlook for U.S. earnings. Analysts’ downgrades have outpaced upgrades since the start of this year, according to a Citigroup (C) report.
However, Wilson says there are already signs of a shift in this trend, and a potential bottom in U.S. stocks.
Wilson stresses that a recovery in the so-called “Magnificent 7” mega-cap technology stocks should help revive the rally in U.S. equities.
“If this group regains relative strength we could see a rotation back to the U.S.,” writes Wilson, referring to the Magnificent 7.
Bloomberg’s Magnificent 7 Index has declined 14% year-to-date amid worries about valuations and the sustainability of high spending on artificial intelligence (A.I.).
Morgan Stanley recommends that investors hold high-quality stocks to benefit from an improvement in the intermediate-term outlook for U.S. equities.
The stock of Morgan Stanley has declined 8% over the past month amid a downturn in the U.S. market. The bank’s shares currently trade at $120.14 U.S. each.
