U.S. Macro Backdrop Backs Cyclical Stocks, Says Morgan Stanley

As the U.S. economy shows signs of resilience, Morgan Stanley analysts highlight that the current macroeconomic conditions are favorable for cyclical stocks. Cyclical stocks, often linked to the broader economic trends, are now drawing increased attention from investors as they stand to benefit from an improving economic landscape.

What Are Cyclical Stocks?

Cyclical stocks are securities whose performance tends to move in sync with the economic cycle. These include sectors such as industrials, energy, consumer discretionary, and materials. When the economy grows, cyclical stocks often outperform, and conversely, they can face pressure during economic downturns.

U.S. Macro Trends Favoring Cyclical Stocks

Morgan Stanley believes several factors in the U.S. macroeconomic environment are providing tailwinds for cyclical stocks:

1. Robust Consumer Spending: Despite inflationary pressures, U.S. consumer spending remains resilient. This bolsters demand for consumer discretionary stocks, as households continue to spend on goods and services that go beyond necessities.

2. Industrial Growth: Industrial production has picked up, thanks to increased manufacturing activity and government spending on infrastructure projects. This provides support to industrial stocks, which often thrive during periods of economic expansion.

3. Energy Demand: Rising energy prices, driven by both geopolitical tensions and steady demand, continue to favor energy sector stocks. With the world still navigating energy shortages and supply chain issues, energy stocks remain a strong bet.

4. Commodity Resurgence: Commodity prices have stabilized after the initial volatility of 2023, which benefits companies in the materials sector. Morgan Stanley sees potential in this sector as global demand for raw materials increases, particularly from emerging markets.

How Investors Can Position Themselves

Morgan Stanley advises investors to consider increasing exposure to cyclical stocks to capitalize on the current economic backdrop. In particular, sectors like industrials and energy are expected to outperform as the economy continues its recovery. However, investors should also be aware of potential risks such as inflation and interest rate hikes, which could create headwinds for growth.

Market Data and Insights

Investors seeking to analyze these stocks further can utilize tools such as Up/Down Grades by Company, which provides information on stock rating changes, helping identify which companies are gaining or losing favor with analysts. Additionally, tracking sector-specific performance through the Technical Intraday (Williams) analysis can give a real-time overview of market movements in cyclical sectors.