Generally speaking, when the U.S. epidemic situation is more and more serious, peoples worries about the economy become more obvious, which is obviously not conducive to the cyclical stocks strongly related to the economy. So why did Morgan Stanley make such an investment proposal?
Michael Wilson, chief equity strategist at Morgan Stanley, explains in his latest report. He believes that the market underestimated two points, which led to misjudgment on the prospects of cyclical stocks and small cap stocks.
First, it underestimated the extent of the US economic recovery in the second half of the year..
Michael Wilson believes that the epidemic has indeed had a serious impact on the U.S. economy, but the unprecedented rescue policy launched by the United States will turn the tide and promote a strong economic recovery. Some people worry that the current U.S. stock market has gone too far, out of touch with economic fundamentals, and does not reflect the looming risks.
The stock market moves much faster than the economy and is usually a great leading indicator. Therefore, the current V-shaped recovery of the stock market indicates a V-shaped recovery of the economy and profits.
The second is the ability of enterprises to use leverage to accelerate profit rebound may be ignored.
In Michael Wilsons view, although drastic cost cutting caused by the epidemic has hurt the economy, once the economy starts to recover, such behavior will leave a lot of room for enterprises to leverage.
This can be seen from the human cost, the biggest cost of enterprise operation. It took only two months for the unemployment rate to rise from 3.5% to nearly 15%, which in normal times takes one to two years. Whats more, the increase in unemployment rate this time is twice that of the normal period, which should make the structure of labor cost more concise.
At the same time, it means that many companies profits will return to pre epidemic levels faster than most analysts expect. Even if the market consensus is that earnings growth will pick up significantly next year, this consensus may underestimate the scope for recovery.
Even if the peak valuation falls, share prices can continue to rise, especially cyclical stocks and small cap stocks that are more sensitive to economic conditions.
There is another point worth noting. Michael Wilson argues that since last year, the operating leverage of us listed companies has become negative. This is exactly a typical feature of the later stage of economic expansion.
He believes that in fact, many listed companies were already in a state of negative leverage before the outbreak of the epidemic. That could mean earnings growth bottomed out in the second quarter. It can be inferred that the enterprises with the deepest negative operating leverage are most likely to have the largest expected increase in earnings next year.
From this perspective, cycle stocks and small cap stocks have the greatest potential.
However, the above expectations may eventually fail due to some factors.