Investing.com — Morgan Stanley (NYSE:) said the outcome of the US presidential election has reinforced its bullishness for quality cyclicals.
According to the firm, the long leg of the Republican win trade did not see significant outperformance leading up to the election day on Nov. 5.
“In other words, this political outcome was not priced, in our view,” strategists led by Michael J. Wilson said in a Monday (NASDAQ:) note.
Morgan Stanley maintains a positive outlook on sectors such as , Industrials, and commodity cyclicals, anticipating further upside due to prospects for a lighter regulatory environment and supportive tax policy.
The firm had upgraded these sectors to overweight in early October, ahead of the election, based on a macro backdrop that was becoming more supportive of cyclical outperformance. This included factors such as Federal Reserve rate cuts and stabilizing business cycle indicators. Morgan Stanley notes the strong outperformance of these sectors last Wednesday and expects this trend to extend.
Within this cohort, Financials remains the top sector pick at Morgan Stanley. The bank upgraded the sector in early October due to a de-risked setup into earnings season, accelerating capital markets activity, and attractive relative valuation and positioning.
The election results have further bolstered Financials, strategists note, with expectations of deregulation adding to its appeal.
“Now that we have the Presidential election results, it appears that expectations for de-regulation are also driving performance upside in addition to improving fundamentals,” strategists said.
Despite recent gains, they find the valuation and positioning of Financials still compelling, reinforcing their overweight (OW) stance on the sector.
On the other hand, Wilson and his team advise caution regarding tariff-exposed consumer stocks, anticipating continued underperformance until there is more clarity on tariff policies.
Interest rates are also a key factor to monitor, although the contained movement in yields has so far allowed cyclicals to outperform and drive indices higher.
Meanwhile, the Wall Street giant reiterated its neutral position on small versus large caps, highlighting the differences from the 2016 post-election period.
Small caps and lower-quality equities, which could have been expected to outperform following the election, are showing a negative correlation to rates in the current later-cycle environment. This sensitivity to rising rates could restrain their relative performance.
In addition, relative earnings revisions breadth for small-cap cyclicals is negative today, unlike the positive breadth seen in 2016. Morgan Stanley suggests that even with an increase in market optimism post-election, small caps’ relative performance may not sustain a significant rally as it did shortly after the 2016 election.
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