Weak growth is a risk for U.S. stocks Author: Investing.com

Morgan Stanley analysts warned that slowing economic growth poses risks to U.S. stocks, especially cyclical and value-oriented sectors.

The bank's report highlights the importance of focusing on large-cap quality stocks and defensive stocks in this environment.

“With economic surprise indexes and bond yields falling, many stocks are now more sensitive to weaker growth conditions,” the bank said. Morgan Stanley said this shift makes earnings growth a more critical factor in stock performance .

The bank found that value and cyclical stocks, especially small caps, were particularly vulnerable. While lower interest rates may traditionally be a boon to these areas, Morgan Stanley believes that in this case, lower rates reflect slower economic growth and pricing power, offsetting any potential upside.

Conversely, Morgan Stanley observes a positive trend in large-cap quality stocks. Earnings revisions were said to be positive for both stocks and shares, while “large-cap stocks, which have lagged behind earnings growth, are also pushing higher. These factors solidify Morgan Stanley's preference for this segment of the market.”

Looking ahead to the possible rate cut cycle by the Federal Reserve, Morgan Stanley reiterated its bullish stance on large-cap growth stocks.

The report concluded: “Our research shows that once the Fed starts cutting interest rates, large-cap growth continues to be the strongest.” They believe this is in line with the late-stage situation of investors looking for quality and long-term growth prospects.

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