Source: Jin10 Data

Morgan Stanley strategist Michael J. Wilson said investors should focus on large companies with solid profitability and growth prospects, including some members of the 'Seven Giants'.

According to Morgan Stanley, investors in the stock market should abandon defensive positions and focus on large companies with solid profitability and growth prospects, including some members of the 'Seven Giants'.

Defensive stocks typically perform relatively well in difficult market conditions and have also risen recently. However, Morgan Stanley stock strategist Michael J. Wilson pointed out in Monday's report that these stocks have become more expensive relative to their earnings.

'It is reasonable to take profits from the recent outperformance of defensive stocks without knowing the next employment report,' the report noted. 'Tactically, we are neutral on defensive stocks versus cyclical stocks.'

The next employment report on the job situation is expected to be released by the US Bureau of Labor Statistics on October 4, revealing clues as to whether the US economy is facing a recession.

Due to concerns about the outlook, traditional defensive industries have performed strongly this year. The Utility Select Sector SPDR Exchange Traded Fund has a return of 26%, the best among the 11 SPDR funds tracking the S&P 500 component industries.

The return rate of the consumer goods industry SPDR is 15%. Although it lags behind the overall market's 20% return, it significantly exceeds the 10% return of non-essential consumer goods funds.

Defensive stocks usually perform well after the Federal Reserve cuts interest rates, which may be a bullish factor as the Federal Reserve announced an aggressive 50 basis points rate cut last week. However, Morgan Stanley pointed out that defensive stocks often show lagging performance at the outset.

"Historically, defensive stocks have consistently outperformed in the 3 to 12 months following the first rate cut by the Federal Reserve, but there may be initial moderate lagging performance within a month after the first rate cut," Wilson wrote.

There are other factors that are unfavorable for defensive stocks: each time the Federal Reserve cuts rates for the first time, it is usually because the economy is in or near a recession. This dynamic favors defensive stocks, but it is not applicable today.

Currently, the valuation of defensive stocks is historically high. According to Morgan Stanley's data, the future P/E ratio is at its highest level since the end of 2022.

So, if one does not select defensive stocks, where can investors find buying opportunities in the stock market? "We continue to recommend large, high-quality investment preferences," the company wrote. It provides investors with a list of stocks recommended by the bank's analysts, including those with high-quality characteristics and steady growth prospects.

This list includes companies in the energy industry like nengyuanhangye$Schlumberger (SLB.US)$and $Baker Hughes (BKR.US)$ financial companies such as $Wells Fargo & Co (WFC.US)$ and $Bank of America (BAC.US)$ ; and members of the "Big Seven"$Amazon (AMZN.US)$and$Apple (AAPL.US)$N/A.$NVIDIA (NVDA.US)$and$Alphabet-A (GOOGL.US)$And$Meta Platforms (META.US)$.