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Morgan Stanley says buy these 19 high-quality stocks set to dominate as a 'rolling correction' threatens riskier names throughout the market

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© Provided by Business Insider Morgan Stanley CIO Mike Wilson named 19 quality stocks to buy as stocks re-rate later this year. Bryan R. Smith / AFP via Getty Images

  • US stocks may fall under pressure this year as stocks rerate, Morgan Stanley CIO Mike Wilson wrote.
  • Defensive signals like falling bond yields are typical of a mid-cycle market.
  • Morgan Stanley has 19 high-quality defensive stocks to buy that offer growth at a reasonable price.
  • See more stories on Insider’s business page.

Major US stock market indexes are still vulnerable amid a “rolling correction” that’s been in place since February, despite what’s been another year of strong returns and fresh highs for stocks.

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That’s according to Mike Wilson, Morgan Stanley’s chief investment officer and chief US equity strategist, who wrote in a July 12 note that recent market moves reflect a “mid-cycle transition” where market breadth narrows, meaning the number of outperforming stocks shrinks.

The S&P 500 has steadily climbed in 2021 and passed Wilson’s year-end target of 4,225 on the back of strong earnings and record levels of fiscal stimulus in a reopening economy, though some stocks and sectors have corrected by over 20%.

But markets are quietly getting defensive, as is typical in the mid-cycle, Wilson wrote. A sudden rush to bonds, which has depressed US Treasury Note yields, reflects an appetite for safety as investors worry that catalysts from the first half of the year, such as stimulus payments and a broad economic reopening, are losing steam.

“Asset prices most levered to these drivers are now under-performing broadly, suggesting there may not be as much pent-up demand as the consensus now is modeling,” Wilson wrote. “Instead, we think there could be a payback as the stimulus fades and year-over-year growth in personal disposable income decelerates and turns negative next year.”

Wilson expects stocks to slide by year’s end in a 20% “de-rating” process where the market’s forward P/E recedes from today’s 21.3x earnings to 18x earnings. Wilson wrote that stocks have only de-rated approximately 5% so far this year.

“We have taken a different view than the consensus citing the potential for a slowdown in the second half of the year due to monetary aggregates’ growth decelerating and peak rate of change on economic and earnings revisions,” Wilson wrote.

A slowdown in growth doesn’t need to sink an investor’s portfolio, however. Larger companies, especially “high-quality” stocks that are financially healthy with reliable profits, usually outperform in this environment, Wilson wrote. He also favors defensive stocks, which often top the market when growth slows. By contrast, small-cap stocks tend to decline when the economy cools.

Here are 19 high-quality, defensive stocks rated overweight (buy) by Morgan Stanley for growth at a reasonable price, along with each company’s ticker, sector, industry and market cap.

1. AmerisourceBergen © Provided by Business Insider Markets Insider

Ticker: ABC

Sector: Healthcare

Industry: Medical Distribution

Market Cap: $23.64 billion

2. Amgen © Provided by Business Insider Markets Insider

Ticker: AMGN

Sector: Healthcare

Industry: Drug Manufacturers

Market Cap: $140.83 billion

3. Atmos Energy © Provided by Business Insider Markets Insider

Ticker: ATO

Sector: Utilities

Industry: Regulated Gas

Market Cap: $12.88 billion

4. Activision Blizzard © Provided by Business Insider Markets Insider

Ticker: ATVI

Sector: Communication Services

Industry: Electronic Gaming & Multimedia

Market Cap: $71.76 billion

5. Becton, Dickinson & Co. © Provided by Business Insider Markets Insider

Ticker: BDX

Sector: Healthcare

Industry: Medical Instruments & Supplies

Market Cap: $72.62 billion

6. Cigna © Provided by Business Insider Markets Insider

Ticker: CI

Sector: Healthcare

Industry: Healthcare Plans

Market Cap: $80.58 billion

7. Costco © Provided by Business Insider Markets Insider

Ticker: COST

Sector: Consumer Staples

Industry: Discount Stores

Market Cap: $182.23 billion

8. CVS Health © Provided by Business Insider Markets Insider

Ticker: CVS

Sector: Healthcare

Industry: Healthcare Plans

Market Cap: $107.03 billion

9. Facebook © Provided by Business Insider Markets Insider

Ticker: FB

Sector: Communication Services

Industry: Internet Content & Information

Market Cap: $993.27 billion

10. Gilead Sciences © Provided by Business Insider Markets Insider

Ticker: GILD

Sector: Healthcare

Industry: Drug Manufacturers

Market Cap: $85.53 billion

11. Alphabet © Provided by Business Insider Markets Insider

Ticker: GOOGL

Sector: Communication Services

Industry: Internet Content & Information

Market Cap: $1,681.79 billion

12. Hill-Rom Holdings © Provided by Business Insider Markets Insider

Ticker: HRC

Sector: Healthcare

Industry: Medical Instruments & Supplies

Market Cap: $7.82 billion

13. Monster Beverage © Provided by Business Insider Markets Insider

Ticker: MNST

Sector: Consumer Staples

Industry: Beverages

Market Cap: $47.68 billion

14. Altria © Provided by Business Insider Markets Insider

Ticker: MO

Sector: Consumer Staples

Industry: Tobacco

Market Cap: $87.69 billion

15. Maravai LifeSciences Holdings © Provided by Business Insider Markets Insider

Ticker: MRVI

Sector: Healthcare

Industry: Biotechnology

Market Cap: $3.72 billion

16. Match Group © Provided by Business Insider Markets Insider

Ticker: MTCH

Sector: Communication Services

Industry: Internet Content & Information

Market Cap: $43.99 billion

17. NRG Energy © Provided by Business Insider Markets Insider

Ticker: NRG

Sector: Utilities

Industry: Independent Power Producers

Market Cap: $10.27 billion

18. O’Reilly Automotive © Provided by Business Insider Markets Insider

Ticker: ORLY

Sector: Consumer Discretionary

Industry: Specialty Retail

Market Cap: $41.26 billion

19. Proctor & Gamble © Provided by Business Insider Markets Insider

Ticker: PG

Sector: Consumer Staples

Industry: Household & Personal Products

Market Cap: $335.37 billion

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