Morgan Stanley: Buy these 37 stocks that can provide strong growth with a soft landing as well as protection if the market tumbles in a recession

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Fears of a recession this spring eventually gave way to confidence that the economy could stick a soft landing. But as fall sets in, that summertime disposition has turned over once more and investors are beginning to worry how markets will fare for the rest of 2023. 

Many investors are “grappling with the uncertainty of where we are in the economic cycle and the narrowness of performance that is making it challenging to keep up with benchmarks,” wrote Morgan Stanley chief investment officer Mike Wilson in a recent note to clients. “As such, most are wondering if the rest of the year will bring more of the same (mega cap growth leadership) or whether markets will pivot and broaden out to areas that have underperformed YTD — i.e., value and small/mid cap stocks.”

Considering the economic question marks looming over investors, from the poor performance of China’s economy to the likelihood of a recession hitting the US, it’s understandable that investors would be unsure of how best to position themselves. 

Luckily, Wilson and his colleagues have a strategy that can hedge any future downside, while capturing upside if stocks manage to end the year on a high note.

How to invest for the rest of 2023

Sentiment has been the driving force behind stock-market gains this year, Wilson wrote. As investor sentiment improved thanks to the diminishing likelihood of a recession, the S&P 500 enjoyed a strong rally while a small cadre of tech stocks carried the market higher. 

“While the investor sentiment pendulum on a recession arriving in 2023 has swung from roughly “70/30” to “30/70″ over the past 6 months based on our dialogue, there is more debate on whether we have avoided it altogether—i.e., soft/no landing, or if it’s just been pushed out to 2024,” Wilson wrote.

If indeed a recession has been pushed to next year, the question then becomes how investors should position themselves for the remainder of 2023. In his conversations with investors, Wilson noted that few are willing to hedge against a recession now that sentiment has swung in a more positive direction. 

At the same time, though, they’re unsure how best to position themselves for profitability. Should investors stick with the mega-cap tech trade that has worked so well this year, or should they turn their attention to the underperforming portions of the market and hope the business cycle turns with them?

At the very least, Wilson has an answer to the latter. “We also think it’s too early to pivot toward small/mid caps or lower quality, early-cycle stocks as some have been arguing. On that score, homebuilding and home-related stocks look particularly vulnerable,” he wrote.

Wilson also worries that investors who lever themselves too closely to the business cycle could get burned. Too pessimistic, and an investor’s defensiveness could keep him from profits — but if an investor is too optimistic and fills his portfolio with cyclical stocks, then he opens himself to problems if the market turns south. 

The solution, Wilson wrote, is to gain exposure to both ends of the spectrum.

“Instead, we continue to think that a barbell of defensive growth (select growth stories and more traditional defensive sectors like Healthcare) with late-cycle cyclicals (Industrials and Energy) is the optimal way to be positioned until it becomes clearer that we are entering either an economic reacceleration or a hard landing outcome,” Wilson wrote.

To that end, Wilson compiled 37 stocks that Morgan Stanley analysts are overweight on. All the stocks are among the top 1,000 by market cap, are classified as growth stocks, and have low volatility, as measured by trailing 252-day volatility that is below the market median. 

All 37 stocks are below, along with their tickers, sectors, industries, and market caps.