A few years of red-hot stock returns, some shaky recent economic data, sticky inflation, and a Fed raising interest rates may make you worry we’re nearing the end of an economic cycle.
But really, we’re in a “classic” mid-cycle market environment, Morgan Stanley says. Stocks and the economy have plenty of room to run, the bank says.
In a note to clients on Monday, the bank said that there are some “hallmark” signs of mid-cycle dynamics. For one, GDP numbers are robust. The market is also starting to place emphasis on stocks whose earnings continue to grow, even in the face of rate hikes.
Mike Wilson, Morgan Stanley’s chief investment officer, said that these high-quality stocks would continue to outperform and that investors should ride the trend as another earnings season approaches.
“Stick with large cap quality stocks,” Wilson wrote in the note. “Our factor work continues to show quality-oriented factors such as high free cash flow yield and low accruals leading the market.”
He continued: “Factors tied to operating efficiency are also seeing clear outperformance, with the high sales-per-employee factor up 5% over the last month. In our view, this ties directly to our constructive call on AI adopters.”
Morgan Stanley has its own quality-factor criteria, with some mentioned above. But generally, quality stocks have consistent and stable earnings growth, high profit margins, a durable competitive advantage, a proven management team, and a healthy balance sheet.
In the note, the bank shared a list of high-quality stocks that fit four criteria: top 1,000 by market cap, improved earnings estimates from three months ago, top third in Morgan Stanley’s quality screen, and rated “Overweight” by the bank’s analysts.
Below, we’ve listed in descending order the 15 largest stocks on the list by market cap.
NVIDIA
Ticker: NVDA
Sector: Information Technology
Industry group: Semiconductors & Semiconductor Equipment
Market cap: $5.28 trillion
Apple
Ticker: AAPL
Sector: Information Technology
Industry group: Technology Hardware & Equipment
Market cap: $4.91 trillion
Micron Technology
Ticker: MU
Sector: Information Technology
Industry group: Semiconductors & Semiconductor Equipment
Market cap: $1.1 trillion
Visa
Ticker: V
Sector: Financials
Industry group: Financial Services
Market cap: $630.4 billion
Mastercard
Ticker: MA
Sector: Financials
Industry group: Financial Services
Market cap: $491.8 billion
Costco Wholesale
Ticker: COST
Sector: Consumer Staples
Industry group: Consumer Staples Distribution & Retail
Market cap: $396.4 billion
Coca-Cola
Ticker: KO
Sector: Consumer Staples
Industry group: Food Beverage & Tobacco
Market cap: $378.8 billion
Lam Research
Ticker: LRCX
Sector: Information Technology
Industry group: Semiconductors & Semiconductor Equipment
Market cap: $336.9 billion
UnitedHealth Group
Ticker: UNH
Sector: Health Care
Industry group: Health Care Equipment & Services
Market cap: $336.7 billion
Arista Networks
Ticker: ANET
Sector: Information Technology
Industry group: Technology Hardware & Equipment
Market cap: $251.6 billion
SanDisk
Ticker: SNDK
Sector: Information Technology
Industry group: Technology Hardware & Equipment
Market cap: $236.3 billion
Gilead Sciences
Ticker: GILD
Sector: Health Care
Industry group: Pharmaceuticals Biotechnology & Life Sciences
Market cap: $187 billion
Seagate Technology
Ticker: STX
Sector: Information Technology
Industry group: Technology Hardware & Equipment
Market cap: $182.6 billion
ServiceNow
Ticker: NOW
Sector: Information Technology
Industry group: Software & Services
Market cap: $143.1 billion
Booking Holdings
Ticker: BKNG
Sector: Consumer Discretionary
Industry group: Consumer Services
Market cap: $128.1 billion