Investing.com – Resilient U.S. labor market data and expectations for a series of quarter-point interest rate cuts from the Federal Reserve warrant a shift into cyclical stocks, according to analysts at Morgan Stanley.
In a note to clients on Monday, analysts added that following the jobs numbers, investors have become increasingly confident that the Fed will achieve a so-called “soft landing” — a scenario in which high inflation is suppressed without triggering deflation. In the broader economy or demand for labor.
Cyclical stocks, which are more volatile and tend to follow economic trends, should be among the best performers as a result, they said.
Analysts upgraded their forecast for cyclical stocks, which can include companies like airlines or automakers that offer discretionary items or services, versus defensive stocks to “overweight.” Defensive names can include broadly profitable goods and services regardless of the state of the broader economy.
At the sector level, analysts upgraded financials to overweight, while healthcare and basics were downgraded to ‘neutral’ and ‘underweight’ respectively.
“We maintain our overweight in utilities as a defensive hedge with exposure to long-term growth,” they noted.
The U.S. economy added 254,000 jobs last month, up from an upwardly revised figure of 159,000 jobs in August, according to a closely watched Labor Department report on Friday. Economists had expected a reading of 147,000.
Meanwhile, the unemployment rate slowed to 4.1%. Expectations were that the figure would be in line with August’s pace of 4.2%.
Average hourly earnings rose 0.4% month over month, faster than expectations of 0.3% but slightly slower than August’s upwardly revised mark of 0.5%.
The 30-stock group hit a record closing high to end the previous week, while technology-heavy stocks added 1.2% and the benchmark index grew 51 points, or 0.9%.
Bets on another big cut were wiped out after the massive 50 basis point cut last month. According to CME Group’s (NASDAQ:) FedWatch tool, there is now a 94.5% chance that the Fed will cut interest rates by a more conventional quarter-point, and a 5.5% chance that policymakers will choose to leave borrowing costs unchanged at the 4.75 range. % to 5.00%.