Morgan Stanley equity strategist Michael Wilson has a cautious outlook for the U.S. stock market, underlining a preference for defensive sectors.
In a note released Monday, Sept. 25, Wilson pointed to the resurgence of defensive sectors' outperformance, while cyclicals and growth sectors have recently faced headwinds.
This caution stems from weakening momentum in discretionary spending, with consumers depleting their pandemic savings buffers and facing the impact of rising interest rates.
Utilities
Wilson highlighted that Utilities trade at an attractive forward price-to-earnings ratio of around 16 times, while Consumer Staples is at a ratio of approximately 19 times.
Consumer Discretionary, Tech Cyclicals Under Pressure
In contrast, Wilson recommends investors to stay underweight in the Consumer Discretionary and Tech sectors.
Wilson points to multiple factors putting pressure on the Consumer Discretionary sector, including slowing consumer spending, the resumption of student loan payments, rising delinquencies in certain household cohorts, higher gas prices, and concerning data from the housing sector.
Although Tech and Consumer Discretionary have secured the second and third spots for the best-performing sectors year to date, Wilson emphasized the current fragility of market breadth.
Only about 30% of stocks have outperformed the S&P 500 year-to-date, and just half of the stocks in the index are in positive territory for the year.
S&P 500 Outlook
Wilson maintains a bearish stance on the stock market throughout 2023, which has so far proven to be inaccurate.
Despite this, the investment bank still maintains a pessimistic one-year price projection for the S&P 500 Index
Under the baseline scenario, the firm expects the index to decline to 4,200 points, representing a 7% decrease from current levels. In the most pessimistic scenario, the S&P 500 could tumble by as much as 18% over the next year, while the most optimistic projection suggests a modest 4% gain.
