Where Morgan Stanley is looking for value after powerful rebound in U.S. stocks

Morgan Stanley Wealth Management's CIO Lisa Shalett cautions that U.S. stock valuations are rich and market complacency is elevated following a powerful rebound, despite recent trade deals and optimism for a cyclical recovery in 2025-2026. While investors are rotating into cyclical stocks, Shalett advises against broad market buying, instead pinpointing value opportunities. She specifically favors the healthcare sector, particularly medical equipment, devices, supplies, and distribution logistics, noting its underperformance year-to-date but seeing it as a policy beneficiary. Shalett also suggests select tech hardware/services, industrials, financials, and energy for their earnings and cash-flow upside potential.

Analysis

The U.S. stock market has demonstrated a powerful recovery from its April lows, with the S&P 500 reaching consecutive record highs, driven by a confluence of technical, positional, and fundamental factors. According to Morgan Stanley Wealth Management, this rebound was catalyzed by a 90-day pause on tariffs and positive developments in trade negotiations, such as a new deal with the European Union. This has fostered investor confidence in corporate earnings and a resilient economy, prompting a rotation from defensive into cyclical stocks. Despite the market's strength, evidenced by the S&P 500's 8.5% year-to-date gain and a broader rally shown by the Invesco S&P 500 Equal Weight ETF's 6.6% rise, Morgan Stanley's CIO Lisa Shalett warns that "complacency is elevated, and valuations are rich." Consequently, she advises against broad passive index investing. Instead, the firm sees specific value opportunities in sectors with potential for earnings and cash-flow upside, particularly highlighting the underperforming healthcare sector—specifically medical equipment, devices, and logistics—as a favored area. Other areas of interest include select tech hardware, industrials, financials, and energy. The market faces a pivotal period with imminent Big Tech earnings, a Federal Reserve policy decision, and key economic data releases.

Key Decisions for Investors

• Given the market's rich valuations and elevated complacency, investors should exercise caution with broad index exposure and consider a more selective, active management approach.
• Evaluate opportunities in the underperforming healthcare sector, particularly within medical equipment, devices, supplies, and distribution logistics, which Morgan Stanley identifies as a key value area.
• Consider tilting portfolios towards cyclical sectors with earnings upside potential, such as select industrials, financials, energy, and specific tech hardware names, in line with the ongoing market rotation.
• Monitor upcoming catalysts closely, including Big Tech earnings reports, the Federal Reserve's interest rate decision, and the July jobs report, as these events are likely to drive significant market volatility and direction in the near term.