Trump's tariffs and the tax bill are splitting the stock market. Here's the playbook for investors, according to Morgan Stanley.
Lisa Shalett, the chief investment officer of the bank's wealth management arm, pointed to the effects of Trump's tax bill and his sweeping tariffs in a recent podcast.
"Now, as the impacts of the tax reform bill and global tariff implementation begin to roll through the economy, we sense that yet another series of great divides are opening up," Shalett said.
Here are the splits that are emerging:
1. Consumer-facing businesses vs. B2B businesses
Businesses that sell directly to consumers are more impacted by any potential weakening fo household balance sheets, a risk that business-to-business firms are less worried about.
Market pros believe that tariffs could weaken consumers' spending power, as companie can pass along the cost of import duties by raising prices.
Shalett added that those pressures are coming at an already critical time for consumers, pointing out that more Americans are falling behind on credit card and auto loan payments.
The job market is also flashing signs of weakness, with payrolls in May and June seeing a large downward revision, while job growth for the month of July was below expectations. A weaker labor market often leads to a pullback in consumer spending.
2. Multinational exporters vs. importers
Multinational exporters outside of the consumer space are facing "fewer external barriers" to sending products abroad, Shalett said, suggesting they were more shielded from the trade war.
Those firms are also benefitting from a weaker US dollar, which is making their products more attractive to foreign customers, Shalett added.
Multinational firms are also typically more capital- and research & development-intensive, she said. That also positions them to benefit more from the tax benefits outlined in the " One Big Beautiful Bill," which creates favorable tax treatment for domestic R&D costs.
"So, with this new structural division emerging, global stock selection is more important now than ever," Shalett said.
Here are some characteristics of the companies investors should be leaning toward, in Shalett's view:
Multinational non-consumer exporters. Tailwinds for these companies should continue, Shalett said.
Select tech, financials, industrials, energy, and healthcare stocks. Stocks in these areas could benefit from some of the policies included in Trump's tax bill, which could lead to upside surprises in earnings and cash flow.
Stocks that aren't "overhyped."
International stocks, commodities, and energy infrastructure. Companies in these areas could help an investor diversify their portfolio, she added.
Sentiment has shifted slightly more bearish in the last week, with Trump doubling down on tariff threats and markets digesting weaker-than-expected economic data.
Goldman Sachs, Evercore ISI, Stifel, Pimco, and HSBC are among the firms that have recently flagged the risk of a stock correction or advised investors to rethink their portfolio allocations.
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