MW International stocks have been crushing U.S. equities. Morgan Stanley expects a reversal.

By Steve Goldstein

Late-cycle backdrop favors U.S. companies and large companies over small, says Morgan Stanley strategist

They say Warren Buffett is the world's greatest investor, but he's going to be retiring 30 years later than the typical American. Winning can be measured in different ways.

But in the stock market, winning is only measured by numbers, and even with nine consecutive gains, the S&P 500 SPX is still down 3% on the year.

Compare that to the iShares MSCI EAFE ETF EFA, which tracks the leading companies in Europe, Australia and the Far East and has rallied 14% in 2025.

So it seems notable that Mike Wilson, chief market strategist at Morgan Stanley, says he likes U.S. over international equities from here. He thinks investors are talking about the wrong issue. "From our conversations, many investors are focused on U.S. vs. international equity market performance from a structural standpoint-i.e., is the U.S. exceptionalism investment narrative changing? Our focus for now is more on the cyclical than the structural," he says.

Wilson is of the view that it's relatively late in the economic cycle, with a slowing macro backdrop, a Fed that's on hold and "sticky" back-end rates.

"In particular, it's a time when quality growth attributes tend to be rewarded as the cyclical impulse slows. U.S. large cap indices stand out positively in this regard with more significant quality growth weights and lower volatility of earnings growth," he said. A weaker dollar should also benefit U.S. companies - to international rivals' detriment.

Wilson also identified other trades his team likes:

-- Large over small caps;

-- Healthcare over staples for defensive hedges;

-- In cyclicals, industrials over consumer discretionary goods;

-- A preference overall for high-quality companies, that have less leverage, high operational efficiency and lower volatility of earnings streams and margins.

Wilson said the next and more important test for the S&P 500 since this rally began a month ago will come at the convergence of the 200-day and 100-day moving averages, in the 5,750 to 5,800 range. He said two of the four items on its checklist for a durable rally have been met - more optimism around a China trade deal and a stabilization in earnings revisions - but a more dovish Fed and a 10-year yield below 4% will be needed to take the next leg higher.

The risks to the downside would be if the labor market deteriorated, but the evidence not just from the payrolls but also corporate earnings calls is that companies are not broadly reducing headcount. "Nonetheless, this data is critical to monitor, and the risk may be more to small business labor forces as these companies tend to have less cost structure flexibility and are more vulnerable to a slowing economic backdrop," says Wilson.

The other risk would be from long-end yields. If the 10-year Treasury yield BX:TMUBMUSD10Y breaks above 4.5%, it would likely turn the "equity return/bond yield correlation meaningfully negative again, thus pressuring valuation."

The markets

U.S. stock market futures (ES00) (NQ00) were pointing lower. Oil prices (CL00) skidded. The Taiwan dollar (USDTWD) continued to surge.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              5686.67    2.92%   12.07%  -3.31%   10.90% 
   Nasdaq Composite                                                     17,977.73  3.42%   15.33%  -6.90%   11.27% 
   10-year Treasury                                                     4.314      10.30   13.70   -26.20   -17.60 
   Gold                                                                 3313.6     -1.23%  10.49%  25.55%   42.04% 
   Oil                                                                  57.47      -7.14%  -5.73%  -20.04%  -26.96% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Warren Buffett said he would retire as chief executive of Berkshire Hathaway $(BRK.B)$.

The OPEC+ grouping of countries boosted production for a second month.

President Donald Trump announced a "process" to put 100% tariffs on foreign-made movies - a significant step as it means services are now part of the tariff agenda for the first time. Netflix shares $(NFLX)$ fell in premarket trade.

Trump also said he had no plans to talk to China President Xi Jinping this week.

The Milken Institute annual conference kicks off with Michael Milken speaking with Treasury Secretary Scott Bessent at 11 a.m. Eastern.

The ISM services report is due at 10 a.m. Eastern, ahead of this week's Fed decision. There's also a $58 billion auction of 3-year notes.

Shell $(SHEL)$ is considering trying to buy BP $(BP)$, though it would wait for further declines in BP's stock price and the oil price, according to a Bloomberg report.

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The chart

The current stock-market correction is tracking almost perfectly with 1998, when markets got hit with the Russian debt default and the LTCM hedge fund blow-up, points out Julien Bittel, head of macro research at Global Macro Investor. "When sentiment gets max bearish and positioning is extremely one-sided, just as liquidity conditions start to improve - which then feeds through into the economic data with a lag - the market scrambles to reprice. That's often where V-shaped recoveries are born," he said in a message on the social media service X.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   PLTR    Palantir Technologies 
   GME     GameStop 
   AAPL    Apple 
   AMZN    Amazon.com 
   TSM     Taiwan Semiconductor Manufacturing 
   META    Meta Platforms 
   BRK.B   Berkshire Hathaway 
   NIO     Nio 

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-Steve Goldstein

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(END) Dow Jones Newswires

May 05, 2025 06:32 ET (10:32 GMT)

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