MORGAN STANLEY: Own these 12 stocks from the energy and industrials sectors, which have historically outperformed the rest of the market by 11% as the economy nears the end of its growth cycle

  • Morgan Stanley strategists say we’re in a late-cycle environment.
  • In a recent client note, the bank listed 12 energy and industrials stocks that should benefit.
  • The list includes Howmet Aerospace, Marathon Oil, and more.

Despite the fact that stocks technically entered a new bull market earlier this year, Morgan Stanley equity strategists believe the US economy is nearing the end of its current cycle.

A team of strategists led by Andrew B. Pauker said in a recent note to clients that various signs point to a late-cycle environment, including the Treasury yield curve remaining inverted, the Conference Board’s Leading Economic Index continuing to fall, stock-market breadth remaining weak, and some macroeconomic indicators indicating softening.

Given the possibility that the economy will continue to deteriorate in the coming months, Pauker believes that late-cycle cyclical and defensive stocks, as well as low-volatility growth stocks, are the best areas of the market to be in right now. He advocated for a two-pronged strategy of defensive growth stocks and late-cycle cyclicals, noting that the two-pronged strategy has outperformed the market by 8% on average in late-cycle environments since 1973. Late-cycle cyclicals outperformed the market by 10.9% during that time period.

Pauker and his team included 12 stocks from the energy and industrials sectors, both of which are considered late-cycle cyclical sectors, in their note as their top picks from each. They believe that stock picking, rather than broad sector exposure, is the best approach at the moment.

“While we believe this investment strategy offers relative performance upside, we think it’s prudent to deploy a stock picking approach as stock specific risk remains elevated for both the overall market and for the defensive growth + late cycle cyclicals cohort,” Pauker said in a statement.

We’ve listed the stocks they’ve chosen below, along with the analyst who covers them and their reasoning for being bullish on the companies.

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