Much of the gains in the S & P 500 this year can be attributed to the “Magnificent Seven” stocks. The group comprises Apple , Amazon , Alphabet , Meta , Microsoft, Nvidia and Tesla , some of which have benefited from the buzz around artificial intelligence despite rising rates this year. The S & P 500 has rocketed nearly 19% in the year to date. Mike Wilson, chief U.S. equity strategist at Morgan Stanley, however, pointed to the “dispersion” in the U.S. market: Large-cap quality stocks have performed exceptionally well, while the “lower quality” smaller-cap companies have been mired in an earnings recession. “So what you have is a real bifurcation of kind of the haves and the have nots,” he told CNBC’s ” Street Signs Asia ” at the Morgan Stanley Asia-Pacific Summit 2023 in Singapore. But can the Magnificent Seven continue to beat the market in 2024? Wilson noted that positive earnings revisions are one thing they’ve had in common in 2023 — a year when most companies had negative earnings revisions. “Now, can that continue? I think it’s going to be tougher in 2024 for these companies to generate that same relative earnings revision breadth, and that’s sort of our view that … either the market is gonna broaden out next year, and we’re gonna see better participation from the 493,” he said, referring to the rest of the stocks in the S & P 500. He said the seven stocks will “probably correct a bit more” as valuations come down — to reflect what will be a “normalization of their growth rate.” His 2024 price target for the S & P 500 is 4,500. That represents a slight downside from Thursday’s close. But, he said, “There’s going to be … a very good stock picking opportunity, probably away from those seven [stocks] … where there should be more opportunities in the 493.” Where to invest The risk of recession will be higher than normal next year, Wilson said. “If that were to play out, you’d want to own pretty much defensives,” he said, adding, however, that the economy isn’t there yet. “So this late cycle environment that we’ve been in probably persists and we’ve been recommending barbells for defensive growth and then industrials and in late-cycle cyclicals like industrials and energy,” he said. A barbell strategy involves striking a balance between risk and reward by investing in the two extreme ends of high-risk and low-risk assets. The current environment is historically a supportive backdrop for traditional defensive sectors such as health care, consumer staples and utilities, select growth opportunities, as well as late-cycle cyclicals such as industrials and energy, Morgan Stanley said in a separate report released last week. Select growth opportunities could be stocks with “lower volatility growth,” the bank said. The bank screened for such stocks that it also rated overweight. They are classified as growth stocks with a trailing 252-day volatility below the market median. “In today’s volatile interest rate environment, we see this cohort offering a balance of relative performance stability along with attractive growth properties,” Morgan Stanley said. These are some names from its screen: Software: Microsoft Tech hardware: Apple, Keysight Financial services: Visa , Mastercard Consumer services: McDonald’s , Marriott International Pharmaceuticals and biotech: Eli Lilly , Thermo Fisher Scientific And here are Morgan Stanley’s other stock picks from traditional defensive sectors, as well as late-cycle cyclicals. Health care and biotech: UnitedHealth , Biogen , Abbvie . Consumer staples: Walmart , Costco . Utilities: DTE Energy , Exelon Corporation . Energy: ConocoPhillips , Marathon Oil , Valero Energy
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