Morgan Stanley: These are the best 65 stocks to buy in 2024 as investors face macroeconomic headwinds, lower growth, and restrictive monetary policy

  • Investors face earnings revisions, weak economic data, and constrictive monetary policy in 2024.
  • Morgan Stanley’s Michael Wilson says the stage is set for a late-cycle investment backdrop next year.
  • The CIO endorses a delicate balance of investing styles and highlighted the 65 best stocks for 2024.

2023 has been a strange year.

On the one hand, the S&P 500 is up more than 17% year to date, which is an outstanding 12-month return by any measure.

The average stock is down this year, seven of the S&P 500’s 11 sectors have declined since January, and the vast majority of this year’s gains can be attributed to a small group of stocks, according to Morgan Stanley.

“Such weak price breadth, in our opinion, is not indicative of a healthy bull market and accurately reflects the challenging earnings dynamics occurring beneath the market’s surface, as evidenced by the weakness we’ve seen in earnings revisions breadth,” wrote Morgan Stanley chief investment officer Michael Wilson in a recent note.

Wilson believes that, while most stocks will struggle in the short term due to macroeconomic headwinds, the strongest minority will continue to outperform — but that, as 2024 progresses, the entire market will gain strength and end the year on a high note.

Here’s how Morgan Stanley predicts the stock market will perform in 2024, as well as the economic warning signs investors should watch for and which stocks are best positioned to outperform next year.

Plenty of headwinds in 2024

Wilson is keeping an eye on two key warning signs that indicate the market is still in for some bumps, despite recent investor euphoria over the latest inflation and job reports, which indicate the Fed may be on the verge of cutting interest rates and easing monetary policy.

The first is earnings revisions, which Wilson noted have been largely negative in the most recent earnings season — despite the fact that stocks have continued to rise across the board, even for stocks reporting lower earnings expectations in the coming quarters.

This indicates that things aren’t going so well behind the scenes, and that companies are preparing shareholders for tougher times ahead.

“Based on the trajectory of these series and the fact that we’re in a weak seasonal period for revisions, we expect these dynamics to persist in the near term and act as a headwind for performance, particularly given the increasingly cautious macro environment noted by companies, a vigilant Federal Reserve and fading fiscal support,” Wilson wrote in a note to clients.

Wilson is also paying close attention to the underlying economic data. Investors may cheer a weak jobs report because it suggests the Fed will lower interest rates sooner rather than later, but higher unemployment will harm the economy in the long run.

Wilson also stated that consumer confidence is deteriorating and that spending may follow. While retailers such as Walmart and Target reported strong results, executives at both companies warned that customers may cut back in the coming months.

“Lower-to-middle income consumers are also facing headwinds including rising delinquencies; we note that these dynamics have been reflected in the stock market, particularly over the past few months,” he wrote in a note. “More specifically, autos, housing-related, transports, leisure travel, smaller cap and/or highly levered stocks have started to trade as if demand is falling off.”

Wilson believes that the combination of lower earnings revisions and weaker economic data, as well as the fact that the recent stock market rally has remained very narrow, suggests that trouble is on the way in the near term.

Wilson claims that these are only the most visible issues that the market must address. Several liquidity injections, including regional bank bailouts and the sale of Treasury bills to offset the Fed’s quantitative tightening, have aided this year’s strong market rally. A larger fiscal deficit meant more spending this year, which artificially boosted economic growth, while the AI hype drove up valuations, a trade that has already begun to fade.

And, of course, Jerome Powell has stated unequivocally that he has no hesitation in keeping interest rates unchanged until he is confident that inflation is under control. Wilson noted that economic data reflecting interest rate hikes lags, and markets have yet to fully absorb the effects of tight monetary policy.

A stronger stock market in 2024

With all of the problems that stocks are currently facing, you’d think the market is in for a rough year. Despite these challenges, Wilson remains optimistic about stocks in 2024.

“We believe we remain in the secular bull market that began in 2009,” he wrote in a blog post. “New growth drivers will continue to emerge that will help to drive performance over the secular time frame (i.e. 20 years).”

Wilson expects earnings growth to accelerate as the year progresses. This is largely due to businesses regaining control of their expenses after inflation and subsequent interest rate hikes harmed revenue and pushed margins down. He believes that companies will regain control of their expenses, demand will increase later in the year, and margins will begin to expand again, all of which will contribute to earnings growth.

Wilson anticipates that increased spending in a variety of industries will provide fiscal support across the market, in addition to strong earnings growth for individual companies.

Wilson believes that a concerted effort to re-shore US businesses will result in higher capex as firms increase domestic manufacturing capacity, which will be supplemented by government spending as the White House supports the Inflation Reduction Act. And the benefits of AI will be felt in the automation of work and increased productivity, resulting in higher profits for companies that stay ahead of the AI curve.

In terms of the Federal Reserve, Morgan Stanley believes the Fed should begin cutting interest rates in June 2024 as core inflation continues to fall. Easier monetary policy will encourage spending by businesses and consumers alike, bolstering both the market and the economy.

The best stocks to buy in 2024

Overall, Wilson is optimistic about the market for next year. He anticipates a 7% increase in earnings through the end of 2024, followed by a 16% increase in 2025. While this earnings recovery will boost stocks, Wilson believes the S&P 500 will end 2024 at 4500, slightly lower than where it is now in mid-November.

Near-term issues are ahead, but longer-term solutions are further down the road, creating a difficult investing situation as the new year begins. As a result, Wilson advises investors to strike a delicate balance in their portfolios for 2024.

“The leading macro data, as well as the equity market’s internals, indicate that we are in a late cycle market environment.” Wilson wrote, “Historically, this has been a supportive performance backdrop for traditional defensives, select growth opportunities, and late cycle cyclicals.” “In line with the historical precedent, the combination of these cohorts has outperformed the broader market during the current regime, which began last year.”

Wilson stated that today’s late cycle market will primarily benefit cyclical stocks in the industrials and energy sectors, but if the cycle shifts, defensive stocks in healthcare, consumer staples, and utilities will begin to outperform.

Wilson’s picks for select growth opportunities include stocks that are immune to market volatility as well as those that will benefit from long-term themes like the rise of AI regardless of market cycle.

Wilson polled Morgan Stanley analysts for their top stock picks for 2024, based on the themes mentioned above. The result is the 65 stocks listed below, each with its ticker symbol, industry group, and last closing price.

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