Morgan Stanley says these 10 stocks are the firm's top selections right now in a group of picks that's doubled the S&P 500 over the last 3 years

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  • Morgan Stanley Chief Investment Officer Michael Wilson says investors’ enthusiasm for stocks might be fading.
  • Wilson, who also serves as the firm’s US stock chief, says investors may not want to pay big bucks for stimulus-boosted profits.
  • But Morgan Stanley’s list of highest-recommended stocks has trounced the broader market since 2018.
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Stock indexes are still hovering near records as July comes to a close, but there are some signs the market is weakening.

“49% of S&P 500 members have experienced a drawdown greater than 10% since May 1, while the index has not corrected more than 4%,” Morgan Stanley Chief US Equities Strategist and Chief Investment Officer Michael Wilson wrote in a recent note to clients. “The market is really dependent on the performance of a small number of large stocks.”

That’s not a new phenomenon. But Wilson says that at the index level, investors are paying hefty prices for earnings that are pumped up by government interventions like stimulus payments. He argues that the weaker performance of individual stocks shows that they may not be willing to pay those prices for much longer.

“We will continue to focus on relative value within the market which means avoiding those areas most vulnerable to our core thesis of multiple compression during the mid-cycle transition while taking advantage of areas where we think valuations and/or earnings remain too low,” he wrote.

Wilson recommends high-quality stocks over low, consumer staples rather than discretionary, healthcare companies over tech, defensive stocks over cyclicals, software over semiconductors, and recommends the broader S&P 500 instead of early-cycle plays like cars and homebuilders.

There’s also his firm’s Fresh Money Buy list, a group of 10 “Overweight”-rated stocks that are considered top recommendations. The regularly-updated portfolio was created in March 2018, and over that time it’s delivered an absolute annualized return of 27.6%, nearly double the 14.6% of the S&P 500 over that span.

The average stock in the portfolio has risen 35.9% over its history compared to, again, an average of 14.6% for S&P 500 components. But it’s not a list of outdated recommendations, as nine of the 10 stocks were added to the buy list in 2020 or 2021.

The stocks are organized from lowest to highest based on the upside the present relative to Morgan Stanley’s price targets. All figures were calculated as of the close of trading on Thursday.