Bank says geopolitical risk rarely derails markets and oil prices would need to double to threaten its positive outlook
Morgan Stanley, the US investment bank, has reaffirmed its bullish stance on American equities despite fresh tensions in Iran and across the Middle East, arguing that history shows such events rarely produce sustained sell-offs.
Analysing 22 geopolitical events since the Korean War in 1950, the bank's equity strategy team found the S&P 500, the main US stock market index, has returned 2%, 6% and 8% on average over one, six and twelve months following such episodes.
The more serious risk to markets, the strategists said, would be a sharp and sustained rise in oil prices, which they estimate would need to increase by 75% to 100% year-on-year to materially threaten the length of the current economic expansion.
With crude prices only modestly positive on a year-on-year basis at the time of writing, and the bank viewing the US as being in an early stage of the business cycle rather than a late one, the team concluded that its positive 6 to 12 month view on US equities remains intact.
On artificial intelligence, the bank pushed back on fears that disruption to services-focused companies poses a broad market risk, noting that the stocks most affected represent only 13% of S&P 500 market capitalisation.
Its analysis of more than 10,000 earnings transcripts found that 30% of companies its analysts classify as AI adopters reported at least one quantifiable benefit from the technology in the fourth quarter, up from 16% a year earlier.
The bank argued that drawing parallels with the launch of the iPhone in 2007 is instructive, as that period showed wide dispersion between winners and losers, with forward earnings growth the single strongest predictor of subsequent performance.
Within sectors, Morgan Stanley said it views banks, consumer finance companies and payments networks as net beneficiaries of AI adoption, while arguing that the bear case for software companies gives insufficient credit to incumbents' ability to participate in the current innovation cycle.
For investors seeking defensive exposure, the bank said healthcare is its preferred option over consumer staples, which have outperformed this year.
Healthcare's relative valuation sits in the bottom 20% of historical levels and its weight in the S&P 500 remains close to all-time lows, the bank said, even as earnings revisions have begun to improve, particularly for large-cap pharmaceutical and biotechnology companies.
Analysis of quarterly 13F filings, which disclose institutional holdings, showed investors added more exposure to healthcare than any other sector in the fourth quarter, with both long-only managers and hedge funds increasing positions.
Morgan Stanley's house forecast for two further interest rate cuts this year, in June and September, should provide additional support to healthcare and biotech valuations, the bank added, and lower the cost of capital for mergers and acquisitions in the sector.