Over the past few weeks, it has made no bones about what it calls a “rolling bear market” — or the type of long, drawn-out pullback that infects sectors one by one.
The firm has been particularly pointed in its comments about tech, which has led major indexes to record highs but is now seen by Morgan Stanley as vulnerable to a sharp sell-off.
But this doesn’t necessarily mean the firm thinks all areas of the stock market should be off-limits. It just means investors need to take a deep breath and look at industries that are depressed, underappreciated, or both.
In the eyes of the equity strategists at Morgan Stanley, the industrial sector fits this to a tee. The firm argues that industrials possess the appealing combination of attractive valuation and future profit upside.
On the valuation front, industrials have become cheap relative to the broader market, even after a massive spike following the 2016 election. This dynamic is shown in the chart below.
In terms of earnings growth, Morgan Stanley notes that upward revisions have diverged from actual performance, which suggests a catch-up is coming. The firm also forecasts that industrial companies will sink enough money into capital expenditures to keep profits growing, even as late-cycle pressure mounts.
Morgan Stanley has even gone as far as to highlight eight industrial stocks it loves and expects to outperform.
Here are the firm’s single-stock picks, which may help you ride the predicted wave higher in industrials: