What a year 2023 turned out to be — and what a year 2024 could become.
Geopolitical conflict, a contentious presidential election, and inflation that remains above the Fed’s 2% target could all derail the Santa Claus rally carrying stocks into the new year.
But investors aren’t interested in hearing that. They’re far too excited about the Fed’s forthcoming monetary policy pivot, as telegraphed by Jerome Powell at his latest press conference.
Morgan Stanley CIO Michael Wilson is well aware of the euphoria gripping markets at the moment and believes the Fed has good reason for cutting rates sooner than expected.
“Inflation appears to be falling in line with the Fed’s forecast and, based on some of the micro data we are picking up, inflation is even lower than the headline statistics,” he wrote in a recent note to clients.
Of course, he acknowledged that it could end up being too much too soon. The Fed is in a difficult position: waiting too long to cut rates might bring about the much-anticipated recession Wall Street warned of at the beginning of 2023, but cutting early could allow inflation to ramp up once again.
“However, with the Fed’s balance of risks tilting toward slowing growth from inflation, this shift is welcome news to equity investors, especially given the bond market’s reaction to the dovish guidance—i.e., inflation breakevens have remained well behaved and bond yields have fallen further as more rate cuts get priced into the market,” Wilson wrote. “In other words, the markets seem of the view that the Fed isn’t making a policy mistake.”
With hope rising but inflation staying above the Fed’s target range, Wilson believes 2024 will be a stock-picker’s market. To help you pick the right stocks, he searched through the 1000 largest US stocks by market cap for stocks in the top 20% by free cash flow yield, the top 20% by EPS growth, and those with overweight ratings from Morgan Stanley analysts.
The 32 stocks he found are below, along with each company’s ticker, sector, industry group, and market cap.