Morgan Stanley: U.S. stock pullback opens up allocation space, strong earnings underpin the appeal of cyclical stocks.

BlockBeats news, October 5 — Morgan Stanley strategists said that U.S. equity valuations have fallen sharply since early summer, and with earnings growth still strong, the investment appeal of some market sectors is increasing.

The team led by Michael Wilson said this pullback has created a "better investment environment" for industries tied to the economic cycle whose fundamental outlook remains solid. Among them, the capital goods sector stands out in particular, with its earnings forecast upgrades ranking among the highest across industries.

Wilson said in a report on Monday: "After the recent valuation downgrade, some asset-heavy sectors are beginning to look more attractive." Since mid-August, the U.S. stock market rally has slowed. Rising bond yields have offset the boost from a strong earnings season, and as companies begin reporting third-quarter results in the coming weeks, the market expects earnings to remain strong.

Bloomberg Intelligence data shows that analysts expect third-quarter earnings for S&P 500 constituents to grow 25% year over year, after a 34% increase in the second quarter. Artificial intelligence demand, record capital expenditures by cloud computing giants, and a strong macroeconomic environment have driven earnings growth.