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Morgan Stanley U.S. equity strategist Michael Wilson has been among the most bearish Wall Street forecasters, expecting a slowdown in both corporate profit and economic growth. In his recently released 2024 outlook, however, he sees light at the end of the tunnel and began preparing clients for a new market rally.

Weak manufacturing activity and deteriorating earnings revision breadth (the number of companies with declining forward earnings estimates versus those with rising estimates) keep Mr. Wilson cautious for the very near term. But his proprietary leading earnings indicator implies a strong recovery in profits in early 2024.

The expected drivers of an earnings resurgence are not only cyclical – an improving economy – but also secular as artificial intelligence improves productivity and profit margins. Morgan Stanley sees the positive effects of AI becoming visible in corporate results in 2024 and adding 30 basis points to net margins in 2025.

U.S. government spending and incentives focused on industrial sectors amounting to over US$1.5-trillion annually in the coming years is also expected to support above-trend corporate profit growth.

In the short-term, Mr. Wilson favours defensive stocks with sustainable earnings growth and low price volatility where Morgan Stanley’s analysts are overweight. These include Nike Inc., McDonalds Corp., Lowes Companies, Costco Wholesale, Colgate-Palmolive and Visa Inc.

Investors were also encouraged to take advantage of market volatility by increasing exposure to Morgan Stanley’s stock list of AI beneficiaries. Companies on this list include Alphabet, Advanced Micro Devices, Nvidia, Adobe, Crowdstrike, Five9 and Palo Alto Networks.

The strategist’s stock screen for high free cash flow, high earnings growth stocks ranked overweight by the company’s analysts include industrials like Curtiss-Wright Corp., L3Harris Technologies and Textron Inc. These could benefit from government spending initiatives.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Bank of Nova Scotia (BNS-T) Given its recent price slide, The Contra Guys’ Benj Gallander is considering buying shares. Though the upside is far less than he normally targets when buying stocks – 100 per cent plus is the norm – an initial sell north of $80 seems reasonable to him. With the stock currently trading near $60, that would offer a handsome return, with dividends to boot.

Li-Cycle Holdings Corp. (LICY-N) This stock hit a new record low this week after the company announced it is cutting jobs, pausing operations at its facility in Kingston, Ont., and halting expansion initiatives in Europe, as it looks for new financing arrangements in response to falling cash levels. As David Berman reports, the stock’s decline is a particularly stark example within the struggling cleantech and renewables sector.

Stryker Corp. (SYK-N) The health-care sector is in a slump right now. However, Stryker shares are up almost 12 per cent this year. If you’ve ever had a hospital stay, you’ve probably been in one of their beds. Or if you’ve had an orthopedic transplant, you may be walking around with one of their artificial knees or hips in your body. Gordon Pape tells us why he’s still recommending the stock.

The Rundown

Goldilocks hopes return to Wall Street after benign inflation report

A benign U.S. inflation report is bolstering hopes that the Federal Reserve can bring down consumer prices without hurting the economy, a so-called Goldilocks environment that investors believe will benefit stocks and bonds. Meanwhile, hedge funds continue to expand their record bearish Treasuries bets at a remarkable rate, which could translate into a powerful rally ahead in bonds as shorts cover.

Three double threat stocks for your portfolio

Although most dividend stocks were hit by the recent rise in interest rates, a few of Gordon Pape’s income portfolio picks have done well this year, thus providing investors with both cash flow and capital gains. He calls them Double Threats. Here are three of them.

Investors expand bets on tech stocks as sector still fuels market gains, filings show

Several hedge funds expanded their bets on big technology stocks including Amazon, Microsoft and Meta Platforms even as these companies stumbled some during the third quarter after having fuelled broad market gains this year, new regulatory filings show. But Warren Buffett’s Berkshire Hathaway trimmed its stake in Amazon, while also shedding holdings in General Motors. Elsewhere, Michael Burry, made famous in the movie ‘The Big Short,’ has placed bearish bets against a semiconductor ETF.

Should my investment strategy change during a recession?

Canada may have entered a ‘technical recession,’ but that is not a reason for your investment strategy to change, says portfolio manager Benjamin Felix. The relationship between economic data and stock returns is much messier than most people realize.

Outlook 2024

Emerging market assets set for tricky start, better finish to 2024: UBS

PIMCO bullish on bonds next year as inflation slows down

Goldman Sachs sees over 7% upside to European equities by end of 2024

Others (for subscribers)

Number Cruncher: How attractive are the valuations of uranium stocks?

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: President cashes out US$1.7-million from this AI play that’s doubled in 2023

Globe Advisor

Flows into fixed-income ETFs jump as investors hope interest rate hiking cycle nears end

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What’s up in the days ahead

David Rosenberg will provide his market outlook for 2024, with a bit of advice on how to position portfolios for it.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

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Compiled by Globe Investor Staff

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