Wall Street's most cautious voice says defensive stocks are now too rich. What alternatives are left?

By Steve Goldstein

Critical information for the U.S. trading day

The S&P 500 has jumped 5.4% over the last two weeks and sits just inches from a record closing high. Fed Chair Jerome Powell last week threaded the needle in delivering a half-point rate cut without triggering growth concerns, says Mike Wilson, Morgan Stanley's chief stock-market strategist.

Wilson has been one of the most cautious voices on Wall Street, but even caution can become too expensive. He says the firm is now neutral on defensives vs. cyclical stocks because of valuation.

Utilities XLU, with a 26% gain, are the best performing of the major sectors, and financials XLF also have outperformed the S&P 500 SPX this year.

"Historically, defensives see fairly persistent outperformance 3-12 months following the Fed's first cut, but can see initial, modest underperformance in the 1 month following the initial rate reduction - a dynamic we're sensitive to, particularly given the Fed's decision to go 50bps vs. 25bps," say Wilson and team in a new note to clients.

While backtracking a bit on defensive stocks, they still like large-cap quality companies. They laid out a road map of how investors should think about different labor-market and monetary-policy scenarios through the rest of the year. "The Fed's larger than expected rate cut can buy more time for high quality stocks to remain expensive and even help lower quality stocks to find some support; however, the labor and other growth data now likely needs to improve in order to justify these conditions through year end," they say.

Morgan Stanley provided a few screens, including one for quality stocks that have overweight ratings from its analysts where earnings per share are expected to grow. It's a list that includes five of the Magnificent Seven (Apple, Amazon.com, Alphabet, Nvidia and Meta Platforms), as well as names such as Walmart (WMT), Bank of America (BAC) and Netflix (NFLX).

The market

U.S. stock futures (ES00) (NQ00) were wavering between gains and losses ahead of Monday's opening bell. Gold (GC00) was steady after hitting new records last week. The dollar DXY was stronger.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              5702.55    1.23%  1.53%   19.55%  31.47% 
   Nasdaq Composite                                                     17,948.32  1.49%  0.39%   19.56%  35.85% 
   10-year Treasury                                                     3.741      11.80  -7.70   -13.99  -79.55 
   Gold                                                                 2647       1.42%  3.66%   27.76%  36.80% 
   Oil                                                                  71.23      1.04%  -7.69%  -0.14%  -20.75% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Regional Fed presidents including the Atlanta Fed's Raphael Bostic are due to speak, as flash purchasing-managers indexes will be released. Bostic said he supported a half-point cut because the current fed funds rate is "a fair distance above" the neutral rate.

The investment form Apollo reportedly offered Intel (INTC) a multibillion-dollar investment as Qualcomm (QCOM) circles the chip manufacturer.

Palantir Technologies (PLTR), now a S&P 500 member, was downgraded at Raymond James.

The Wall Street Journal reported that Taiwan Semiconductor and Samsung have discussed building major factories in the United Arab Emirates.

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This chart shows gold vs. the stock market since Bernanke's famous helicopter drop speech.

The chart

There's almost never a period where the buy-and-hold approach is outperformed. Henry Neville, a portfolio manager at hedg- fund manager Man Group, put together this chart looking at annualized excess returns for different rules applied from 1926 to the present. Buying 5% from the peak and then selling up 70% is the only configuration that yields better than 6.4% returns over cash, he finds. "This is an alluring implementation of the 'be greedy when others are fearful, and fearful when others are greedy' saw. And yet it doesn't work," he says.

Top tickers

Here were the top-performing stock-market ticker symbols on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   INTC    Intel 
   PLTR    Palantir Technologies 
   HOLO    MicroCloud Hologram 
   AAPL    Apple 
   NIO     Nio 
   DJT     Trump Media & Technology 
   TSM     Taiwan Semiconductor Manufacturing 

Random reads

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A missing house cat made its way from Yellowstone to California.

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-Steve Goldstein

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09-23-24 0845ET

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