almost 4 years ago • 2 mins
Investment bank Morgan Stanley’s quarterly earnings aren’t due until Friday, but the firm’s U-turn on smaller stocks has already grabbed investors’ attention this week ↩️
Morgan Stanley’s strategists have been “underweight” US small- and mid-cap stocks since mid-2018. In other words, the bank thought investors should steer clear of indexes like the Russell 2000 and instead focus on buying shares of the largest American companies: the S&P 500, for example.
Higher relative costs for smaller companies had led to years of lower profit margins (and share prices) than their globalized cousins – and while business confidence and consumer spending remained strong, so too did larger companies’ earnings.
But the coronavirus has changed all that – and Morgan Stanley’s view with it. After the US Federal Reserve (“the Fed”) extended its economic response on Thursday to include loans for small and medium-sized American businesses, the investment bank now thinks smaller-cap stocks stand to benefit after years of underperformance 🙌
Morgan Stanley’s long been seen as one of the more pessimistic investors out there, but it also joined other banks in raising its 2020 projections for the S&P 500 on Monday. Absent any sudden surge in coronavirus infections, the American market should now have bottomed out; JPMorgan Chase even thinks US stocks could hit a new all-time high within a year.
The Fed’s all-out strategy to avoid economic depression may lead to higher stock valuations, but Morgan Stanley thinks investors will have to act fast to capture the extra “risk premium”. It also warns that the much-hyped leaders of yesteryear – particularly tech stocks – could see their share prices suffer following disappointing earnings in the coming weeks 😯
Smaller stocks’ outperformance last week, meanwhile, may be an early sign that these companies will lead the market recovery in the longer term. And with investment in the likes of the Russell 2000 easily available via exchange-traded funds, Finimizers might want to take note…
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