Analysts at Morgan Stanley have observed a shift in the U.S. stock market, suggesting that investors might be anticipating a scenario of sustained economic growth without a downturn, often referred to as a "no landing" situation. This perspective marks a departure from the previously expected "soft landing," which predicted modest economic growth coupled with a decline in inflation from its peak levels.
According to a recent note by Morgan Stanley, both macroeconomic data and the performance of leading stocks are beginning to align with the "no landing" forecast. This change comes amidst strong economic indicators and inflation figures that have surpassed expectations, leading to a decrease in the anticipated Federal Reserve interest rate reductions. Current market bets have scaled back to foresee only 62 basis points in rate cuts for the year, a significant reduction from the 150 basis points projected in January.
Industries closely tied to economic expansion, including financials, energy, and industrials, have outperformed this year, each surpassing the S&P 500's 9% increase in 2024. The materials sector, another indicator of economic health, has also seen impressive gains. This broad market success contrasts sharply with last year's trend, where a select group of large-cap tech and growth stocks dominated the market's advancements.
Morgan Stanley highlights the leadership of cyclical industries in this market broadening, suggesting it supports the expectation of an improving growth environment. However, the strategists emphasize that quality remains a crucial factor for the leading stocks, indicating a preference for more established, stable investments during what is still considered a late-cycle growth phase rather than an early-cycle acceleration.
The limited rise of the small-cap Russell 2000 index, up just 2.4% this year, and the potential impact of Treasury yield movements on market performance were also noted. With the 10-year Treasury yield currently above the level Morgan Stanley identified as impactful to stock sensitivity, shifts in yields could significantly influence the market's direction.
