Morgan Stanley says conditions are ripe for software, healthcare and bank stocks
Morgan Stanley says a new class of stocks is getting ready to emerge.
Labor Day marks the final stretch of what's been a pretty good year for stocks. The S&P 500 SPX is up 14% this year, the small-cap Russell 2000 RUT has gained 20%, semiconductor stocks SOX have soared, basically everything but the Magnificent Seven is returning double digits.
Stock-market strategists at Morgan Stanley led by Mike Wilson said that performance is no accident. "This has all coincided with what we have deemed a new economic cycle that began at the trough of the rolling recession around Liberation Day in April 2025. The reacceleration in sales growth has led to a V-shaped rebound in EPS [earnings per share] growth as operating leverage returned to the median company," they say.
But the one part of the market that has cooled are so-called momentum stocks, whose precise definitions vary but basically are bets that fast-rising stocks will continue to gain ground. Semiconductor shares in particular peaked in June.
So the question is, will the chip stocks resume their rally? Wilson and team say there may be one last gasp - they say the moves in chips continue to mirror the silver price rally last year - but they no longer see that group leading the market. "We disagree with those claiming that nothing has changed fundamentally in terms of market leadership, and that the momentum selloff was simply a repositioning of overleveraged portfolios. We think this transition to mid-cycle is what drove the repositioning, which was then exaggerated by the leverage," they say.
A mid-cycle rotation favors free cash flow, operational efficiency and capex discipline, and that in turn means conditions are ripe for software - earlier in the year, the victim of AI disruption fears - financial services, insurance and healthcare services. In short, the market is moving from AI enablers to AI adopters.
Already, earnings revisions for these sectors are improving, the strategists note.
The biggest risk the strategists see is from the recent break higher in long-end rates. Their rate concerns are not from fretting about fiscal sustainability but stem from strong nominal growth, oil and energy markets and excess supply from both sovereign and corporate issuance.
The markets
The main U.S. stock market futures contracts (ES00) (NQ00) traded cautiously after the three-day break. The yen (USDJPY) continued to rally as the dollar fell below 154 yen. Brent oil futures (BRN00) were trading around $99 per barrel.
Key asset performance Last 5d 1m YTD 1y S&P 500 7718.6 0.09% -0.50% 12.75% 19.09% Nasdaq Composite 26,506.99 0.40% -0.69% 14.05% 22.15% 10-year Treasury 4.795 3.90 8.20 62.30 75.20 Gold 4439.9 -1.28% -0.20% 2.49% 20.73% Oil 93.97 8.87% 14.18% 63.68% 50.45% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
Canadian retaliatory tariffs on $20 billion worth of U.S. goods took effect on Tuesday.
Houthi rebels hit Saudi facilities on Monday and Tuesday.
Amgen shares $(AMGN)$ fell after a late-stage setback for a rival cardiovascular drug made by Novartis $(NVS)$, which on Tuesday reported a different setback on a muscular disease drug.
The New York Federal Reserve on Tuesday will release the latest update on consumer inflation expectations. The big releases will be producer prices on Thursday and then consumer prices on Friday.
There's a $58 billion auction of 3-year notes.
A 175-year commodity market rule is starting to break
The chart
Deutsche Bank strategists led by Jim Reid make a similar point to Morgan Stanley's Wilson - high Treasury yields are linked to the strong economic growth, when measured by nominal gross domestic product, which includes inflation. In fact the current gap between nominal GDP and the 10-year Treasury is significantly above the usual 70 basis points. "Clearly nominal GDP may be inflated by energy prices but overall it's hard to say U.S. yields are too high based on this. If nominal GDP settles at 5.5% then 4.8% would be historically average. If we settle at 6% due to AI and inflation, then around 5.3% is reasonable before factoring in fiscal concerns," they say.
Top tickers
Here were the top performing stock-market tickers as of 5 a.m. Eastern.
Ticker Security name NVDA Nvidia TSLA Tesla SPCX SpaceX MU Micron Technology INFY Infosys TSM Taiwan Semiconductor Manufacturing Co. GME GameStop AAPL Apple AMD Advanced Micro Devices NIO Nio
-Steve Goldstein