Stocks 'disconnected from reality'; Morgan Stanley screens those 'unfairly punished'
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The stock market stumbled again trying to price in a Fed pivot that is still a ways away, according to the equity team at Morgan Stanley.
Morgan Stanley strategist Mike Wilson, who nailed the bear market call in 2022, says the lows for stocks (IVV) (VOO) (SPXU) (UPRO) (SPXL) (SSO) won't arrive until late spring, with risk-reward "as poor as it's been in our view."
"Back in late July we hypothesized that the market was trying to price a Fed pivot that wasn't ultimately coming any time soon," Wilson wrote in a note. "It appears equities may have just made the same mistake again as sector leadership YTD (driven by Tech (XLK) (XLC) (XLY) and Growth (QQQ) (ARKK) (PTF) (MEME)) looks aligned with last summer's bear market rally when premature hope for a Fed pivot was the underlying narrative."
"Thus, with hope for a Fed pivot now dwindling and fundamentals deteriorating further, price is about as disconnected from reality as it's been during this bear market." (Emphasis added).

Stock picking crucial
"From a technical standpoint (charts) show the key trendline resistance we have been watching for the S&P 500 (SP500) (NYSEARCA:SPY)," Wilson added. "This is a critical resistance/support line that goes back to the beginning of the secular bull market that began after the Great Financial Crisis."
"After briefly breaking above this resistance 2 weeks ago, the S&P 500 has fallen below once again and appears to be vulnerable to the bear market resuming just as the consensus has given up on the timing," he said. "In other words, investors need to be ready for the cyclical bear to reassert its primary trend immediately."
With stock picking key in a tough macro environment, Morgan Stanley screened for high-quality companies that have been unfairly punished by the market.
The criteria are: Owerweight rating for more than 1 year, market cap higher than $1B, price target upside greater than 20%, trailing 12-month return benchmarked to the GICS industry average below -5%, trailing 12-month absolute return worse than -10% and Morgan Stanley analyst confirmation of the pick.

The stocks are:

Amazon (AMZN), upside to price target 52.7%, trailing 12M returns -39.1%, trialing 12M returns to benchmark Internet & Direct Marketing Retail Index -17%
Centene (CNC), 43.9%, -16.7%, -22.8 to Healtcare Provider and Services Index
Schwab (SCHW), 24.4%, -14.7%, -7.1% to Capital Markets Index
Datadog (DDOG), 31.9%, -46.4%, -35% to the Software Index
Endeavor Group (EDR), 38.9%, -34.8%, -8.9% to the Entertainment Index
Global-e Online (GLBE), 31.3%, -32.8%, -11.5% to the Internet & Direct Marketing Email Index
Inari Medical (NARI), 55.3%, -31.6%, 16.5% to the Healthcare Equipment & Supplies Index
Match Group (MTCH), 90.6%, -59.7%, -21.2% to the Interactive Media & Services Index
Natera (NTRA), 59%, -40%, -57.2% to the Biotechnology Index
Regenxbio (RGNX), 117.4%, -16.8%, -33.9% to the Biotechnology Index
Rocket Lab USA (RKLB), 119.8%, -57.2%, -68.2% to the Aerospace & Defense Index
Smartsheet (SMAR), 27.4%, -31.8%, -20.5% to the Software Index
Snowflake (SNOW), 38.3%, -47.2%, -36.2% to the IT Services index
Southwest Airlines (LUV), 80.8%, -25.5%, -13.6% to the Airlines Index
Ultragenyx Pharmaceutical (RARE), 109.4%, -39.3%, -56.5% to the Biotechnology Index
Zoetic (ZTS), 54.2%, -19.8%, -19.3% to the Pharmaceuticals Index
Zoominfo Tech (ZI), 25.9%, -50.6%, -12% to the Interactive Median & Services Index

See why Morgan Stanley is getting cautions on Treasuries and less bearish on the greenback.