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### Leveraging AI Picks and Defensive Strategies to Outperform Stock Market Expectations in 2024

“The leading macro data suggests that we’re in a late cycle market environment,” Morgan Stanl…

Mike Wilson, the renowned U.S. equity strategist and investment chief at Morgan Stanley, has maintained a bearish stance on Wall Street for the past two years. Despite some of his gloomy predictions for 2023 falling short, Wilson remains concerned about the future profit potential of the stock market.

Wilson’s forecast suggests minimal change in the S&P 500 over the next year, with a modest increase of only 2% to reach 4,500. He anticipates challenges for businesses and corporate earnings in 2024 due to the prolonged impact of inflation and escalating interest expenses.

While Wilson projects that investors in large market indexes may not see significant profits in the upcoming year, he offers recommendations to maximize returns. In an email to clients, he highlights the importance of focusing on “late-stage cyclical” investments in the energy and transportation sectors, alongside defensive stocks in consumer staples and healthcare that typically perform well during economic downturns. Surprisingly, Wilson also identifies select growth opportunities, particularly in the field of artificial intelligence, which he believes hold promising long-term potential despite his near-term pessimism.

Referring to the current market environment as reminiscent of the period preceding a crisis, Wilson emphasizes the importance of selective stock picking in such conditions.

Headwinds for Near-Term Earnings and Stock Market Industry

Before delving into Wilson’s stock picks for 2024, it is essential to understand his overall pessimistic outlook. Wilson acknowledges underestimating the resilience of the stock market and the economy in 2023. Despite his initial concerns about declining corporate profit margins and economic challenges amid rising rates and prices, the S&P 500 closed the year above 4,400, surpassing his earlier projections.

Wilson admits that the earnings growth trajectory for the S&P 500 has been lower than expected, attributing the market’s unexpected strength to the exceptional performance of major tech stocks. He notes that these tech giants effectively managed costs and navigated a market environment influenced by substantial fiscal stimulus.

While many publicly traded companies faced significant earnings challenges, Big Tech’s resilience helped the S&P 500 recover from a tough 2022. Wilson warns that this resilience may be indicative of a typical late-cycle behavior.

Looking ahead, Wilson suggests that as the Fed adjusts rates in 2024, near-term uncertainties may give way to an earnings recovery. However, he cautions that this recovery may not suffice to meet investors’ accustomed returns, with his projected annual return of 2% significantly lower than the historical average.

Contrary to Wilson’s bearish outlook, other experts like Ed Yardeni and UBS foresee more optimistic scenarios for the S&P 500 by the end of 2024.

Wilson anticipates a challenging investment landscape in 2024 despite the potential weakness in the stock market. He advises investors to focus on individual stocks with strong valuations rather than relying solely on large market indexes.

Protective Strategies, Late-Cycle Plays, and AI Innovations

Wilson recommends concentrating on traditional defensive stocks, such as those in healthcare and consumer staples, which tend to be less affected by economic cycles. These sectors provide essential services that remain in demand even during economic downturns.

Additionally, Wilson highlights the potential of “late-stage cyclical” stocks, including companies in the aviation, oil and gas, and aerospace and defense sectors, which have the potential to outperform in 2024.

Moreover, Wilson underscores the significance of investing in AI-related opportunities, despite the usual challenges growth stocks face during economic uncertainties. He believes that AI technologies can enhance productivity and profitability across various industries, creating innovative business opportunities.

As the Fed potentially lowers interest rates in response to a crisis, Wilson suggests that growth stocks, particularly those related to AI, could benefit from this shift in monetary policy.

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Last modified: December 19, 2023
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