As global growth troughs and expectations rise for a U.S.-China trade deal, investors surveyed by Morgan Stanley are favoring emerging markets and Europe as the next areas for outsized equity returns. Morgan Stanley concurs with this view. "A better ex-US growth outlook and cheaper valuations means we prefer ex-US equities to the US," as they write in a report released on Nov. 25, 2019 by their U.S. equity strategy team led by Mike Wilson, 2020 Outlook--What Investors Are Saying.

Among U.S. equities, Morgan Stanley generally favors financials and defensive stocks, particularly consumer staples and utilities, "for a cyclical hedge that we think is priced appropriately for downside risks." The report highlights these 10 stocks on their Fresh Money Buy List, with the projected gains to Morgan Stanley's price targets: The Walt Disney Co. (DIS), +8%, Humana Inc. (HUM), +6%, Iqvia Holdings Inc. (IQV), +18%, Coca-Cola Co. (KO), +13%, Microsoft Corp. (MSFT), +5%, NextEra Energy Inc. (NEE), +4%, Philip Morris International Inc. (PM), +12%, Procter & Gamble Co. (PG), +11%, Progressive Corp. (PGR), +19%, and T-Mobile US Inc. (TMUS), NA.

Key Takeaways

  • Morgan Stanley sees better upside in equity markets outside the U.S.
  • Among U.S. stocks, they favor defensives.
  • Their gauge of investor sentiment is in "exuberant" territory.

Significance For Investors

For regulatory compliance reasons, Morgan Stanley could not offer a price target for T-Mobile at this time. Regarding U.S. stocks, the report says, "After the recent rally equity markets are now pricing a decent recovery, so upside appears limited." It adds, "We think Growth stocks could be the under performer as the crowded source of funds." Meanwhile, "Most investors see limited upside to the S&P, but agree central bank balance sheet expansion could lead to an overshoot of fair value."

Morgan Stanley's economists project that global GDP growth will increase from 3.0% in 2019 to 3.2% in 2020. For the U.S., they forecast GDP growth in 2020 to be much lower, at 1.8%. Accordingly, Morgan Stanley remains bearish about earnings growth for U.S. companies: "Our earnings model is telling us that the consensus forecast of 10% [S&P 500] EPS growth in 2020 is likely to miss and actually be closer to 0%."

Regarding health insurance company Humana, Morgan Stanley analyst Ricky Goldwasser notes that a recent meeting with management "reinforces a laser focused strategy" on expanding its existing acquisition plan and generating operational efficiencies that should accelerate earnings growth after 2020.

NextEra Energy is the leading electric utility in Florida, as well as the world's largest producer of renewable energy from wind and solar. It also is a global leader in the battery storage of power, and operates eight nuclear electric generation plants across the U.S.

Looking Ahead

Morgan Stanley points out that their Equity Risk Indicator, a proprietary gauge of investor sentiment and positioning, is now in "exuberant" territory. This, of course, is a negative indicator for contrarians.

As far as projections for the S&P 500 at the end of 2020 are concerned, Morgan Stanley's bull case is 3,250, their base case is 3,000, and their bear case is 2,750. Given that the index opened at 3,117 on Nov. 25, these scenarios represent prospective moves from today of, respectively, +4.2%, -3.8%, and -11.8%.