Institutional Investors Show Increased Confidence in Soft Landing, According to Morgan Stanley

Institutional investors are experiencing renewed confidence in a U.S. soft landing, according to a recent note from Morgan Stanley strategists. Following over 150 meetings with institutional players in North America, the firm’s equity strategists observed a notable change in sentiment regarding the soft landing narrative.

They indicated that there was significantly less apprehension about the soft landing concept compared to what had been noted throughout the summer and during the recent growth concerns. Investor discussions primarily revolved around strategies to navigate this scenario, with particular interest in cyclicals and rate-sensitive stocks.

The term “goldilocks” emerged frequently after the Federal Reserve’s 50 basis point rate cut, signifying an economic environment characterized by moderate growth and inflation. Investors were particularly keen on finding ways to align their portfolios with this “goldilocks” scenario.

This newfound confidence marks a significant departure from the growth uncertainties experienced earlier in the year, where there was heightened anxiety over the possibility of a hard landing. The note highlighted that only one investor expressed serious worries about a hard landing, indicating a shift in overall sentiment.

The strategists drew parallels between the current situation and the mid-1990s, noting the relevance of their strategies from that era, which included positioning for a soft landing. They emphasized that the optimal approach to benefit from the “goldilocks” scenario would involve a mix of select cyclicals with strong fundamental drivers, rate-sensitive stocks, a resurgence in sustainable growth from Europe’s quality tech and AI sectors, and an emphasis on idiosyncratic stock selection.

Despite the rising confidence in a U.S. soft landing, concerns persist regarding China’s economic outlook. Morgan Stanley highlighted that sentiment towards China was significantly low leading up to the country’s recent stimulus announcements. Nevertheless, many investors remain cautious, especially in sectors like Metals & Mining that are closely tied to Chinese demand.

The strategists noted, “Most investors considered the sharp decline in steelmaking raw materials to be exaggerated.” However, they seemed hesitant to position for a potential rally due to low confidence in the effectiveness of Chinese stimulus measures and the typical transient nature of seasonal Q4 recoveries.

Simultaneously, the optimism surrounding the soft landing narrative has led to increased interest from U.S. investors in European markets, with many seeking specific opportunities for alpha generation.