Strong Jobs Report to Boost Cyclical Stocks, According to Morgan Stanley

Investing.com — Analysts at Morgan Stanley suggest that resilient labor market data from the U.S. and expectations for a series of quarter-point interest rate cuts by the Federal Reserve indicate a favorable shift toward cyclical stocks.

In a note to clients on Monday, they observed that, following the recent jobs data, investor confidence is growing that the Fed can achieve a “soft landing.” This scenario involves controlling elevated inflation without triggering a downturn in the overall economy or a decline in employment demand.

According to the analysts, cyclical stocks—which are generally more volatile and closely aligned with economic trends—are expected to lead in performance within the equity market. They have upgraded their outlook for these stocks, which include businesses such as airlines and automakers that provide discretionary goods and services, to “Overweight,” shifting away from defensive stocks, which are typically more stable regardless of the economic climate.

On a sector basis, the analysts have also upgraded financial stocks to overweight while downgrading healthcare to “Neutral” and consumer staples to “Underweight.” They maintained an overweight position in utilities as a defensive measure with potential for long-term growth.

The U.S. economy added 254,000 jobs last month, up from a previously revised total of 159,000 in August, surpassing economists’ expectations of 147,000. The unemployment rate ticked down to 4.1%, falling from August’s rate of 4.2%, which was anticipated to remain unchanged.

Average hourly wages increased by 0.4% for the month, exceeding predictions of 0.3%, though it was slightly lower than the adjusted figure of 0.5% from August.

The Dow Jones Industrial Average reached a record closing high at the end of the previous week, while the tech-driven Nasdaq Composite rose by 1.2%, and the S&P 500 gained 51 points, marking a 0.9% increase.

Speculation for another significant rate cut—following a larger-than-usual 50-basis-point reduction last month—has significantly diminished. Current estimates indicate a 94.5% likelihood of a more conventional quarter-point cut, with only a 5.5% chance that the Federal Reserve might opt to keep rates steady within the range of 4.75% to 5.00%.