Why Morgan Stanley Is Overweight on the Financial Sector

Morgan Stanley’s (MS) Mike Wilson has shared his firm’s outlook on the various sectors of the S&P 500 index (SPY). His firm is overweight on the financial sector (XLF) and the technology sector (XLK). It also has a positive view on various sectors such as energy (XLE) and industrial (XLI). According to Wilson, these sectors will benefit the most from tax reform.

Various factors are supporting the movement of the financial sector (VFH), including the following:

• Fed’s gradual rate hike process
• strong earnings of financial stocks
• recent bank stress test outcome
• proposed deregulation

Between December 2015 and September 2017, the Fed hiked its key interest rate four times. It raised it 25 basis points each time. The rate is now in the range of 1.0%–1.25%. The gradual rate hike by the Fed is expected to increase the profit margins of financial stocks.

Many companies of the S&P 500 index (IWM) lowered their future earnings estimates. Rising geopolitical risks could hamper their sales and earnings growth. But many investment firms are optimistic about the domestic economy. A stronger demand in the domestic economy could drive growth.

In the next part of this series, we’ll look at Wilson’s view on the technology sector.