Here's the biggest buying opportunity in the stock market ahead of Fed rate cuts, according to Morgan Stanley's chief equity strategist
That's according to Mike Wilson, the chief US equity strategist at Morgan Stanley, who thinks he's identified the biggest buying opportunity in stocks: the areas that have lagged behind the broader market so far this year.
Speaking to Bloomberg on Wednesday, Wilson pointed to areas like housing, commodities, consumer goods, and small caps, which have all underperformed the broader market this year.
Those areas have struggled in part because the economy looks like it was going through a rolling recession, Wilson said, referring to a downturn that spreads through various sectors one at a time.
But the story for these laggards could change soon for two reasons, in his view.
1. Improving earnings revisions
Wilson said Morgan Stanley had been bullish on the financials, industrials, and software sectors since April of this year, due to expectations of strong earnings revisions breadth. That's played out well so far, with the financials, industrials, and tech sectors of the S&P 500 up year-to-date.
"At the end of the day, I do think the biggest opportunity going forward is the areas that have not seen those revisions yet," Wilson said.
Stocks in the housing, commodities, and consumer goods sectors and small-cap stocks have been rattled this year, in large part due to higher interest rates and concerns swirling around President Donald Trump's tariffs.
The consumer goods sector, in particular, is likely going to feel the impact of tariffs soon, Wilson said — but that only adds to his bull case.
"So, in the very short term, we actually think revision breadth could come down a bit as some of these tariffs flow through the cost of goods sold. But that's just going to create the next buying opportunity," he added.
2. Fed rate cuts incoming
Markets are also expecting a slew of Fed rate cuts over the near-to-medium term, which should help some of the market's laggards.
Wilson said Morgan Stanley expected the Fed to remain pat on a rate cut through the rest of 2025, but trim interest rates as much as seven times in 2026. Investors, meanwhile, are expecting rate cuts even sooner, with markets pricing in a 93% chance the Fed could cut rates by a quarter-point in September, according to the CME FedWatch tool.
"I mean, that's like wildish bullish for equities, okay? So, you know, you almost have the perfect set-up," Wilson said, adding that areas like small-caps, which are rate-sensitive, will "love" the easing of monetary policy.
Wilson, who remained bearish on stocks in recent years before flipping his stance in 2024, has had his eye set on various buying opportunities in the market his year. In July, he said any dips in the market could represent prime opportunities for investors to load up on stocks, and forecast the S&P 500 to end the year around 6,500, around 2% higher than the index's current levels.
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