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Since June, investors have shifted towards more defensive sectors like utilities, Morgan Stanley’s equity strategists observed.
They’ve been writing to clients this year about a drawn-out bear market in equity valuations and how to prepare.
On Monday, they said it’s time to get more defensive and downgraded the tech sector to underweight, with a list of reasons why the sector may not be as rewarding to investors in the near term.

The stock market is at a turning point, according to Morgan Stanley.

For many months, the bank’s equity strategists have written to clients about a forthcoming rotation towards defensive sectors, which investors prefer during downturns. They warned about a long, drawn out bear market in valuations that’s underway, marked by slower profit growth. They recommended utilities as the best defensive sector as the broader stock market risks losses.

In a note on Monday, Mike Wilson, the chief US equity strategist, said the market’s turning point arrived in June. Since June 18, defensive sectors like utilities and real estate have outperformed cyclical sectors like tech and financials.

Wilson also identified that two out of three conditions for a rotation to defensive sectors are happening, and investors are discounting them: peaking S&P 500 earnings-per-share growth on a year-on-year basis, and a top in the 10-year Treasury yield. The third would occur if the 10-year yield falls below the 2-year — a so-called yield-curve inversion.

They took their defensive call into a higher gear by downgrading small-caps to equal-weight, and tech stocks to underweight, in a client note on Monday. They also upgraded consumer staples and telecom stocks to equal weight.

“We think it makes sense to lower broad [tech] exposure in the near term, or, at the very least, hedge sector exposure aggressively into earnings season as elevated valuations, lack of material earnings …read more

Source:: Business Insider

      

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