Where Morgan Stanley is looking for value after powerful rebound in U.S. stocks
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The U.S. stock market has seen a massive rebound since ”liberation day” tariffs were announced on April 2. – Agence France-Presse/Getty Image
The U.S. stock market mostly added to its big rebound from its April low after President Donald Trump announced on Sunday a trade deal with the European Union, amid worries over rich valuations.
Investors have been rotating into cyclical stocks from defensive equities amid signs of a resilient economy and confidence in corporate earnings, Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note Monday. The rotation was partly amplified by optimism over the One Big Beautiful Bill Act suggesting “a capex boom and cyclical recovery in the second half of 2025 through 2026, potentially further fueled by Federal Reserve rate cuts,” according to her note.
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The stock market has rebounded from the early April selloff sparked by Trump’s announcement of “liberation day” tariffs. The market recovered after the White House paused the tariffs and investors perceived positive developments as the U.S. worked on trade deals.
The S&P 500 SPX closed at a record high each day of last week, ahead of Trump’s meeting Sunday with European Commission President Ursula von der Leyen in Scotland on trade. They reached an agreement under which the European Union will pay 15% tariffs for most goods imported to the U.S. That followed other trade deals announced last week, including with Japan.
“The equity market’s powerful recovery from the tariff uncertainty bear market has been driven by multiple factors—technical, positional and fundamental,” Shalett said. “Oversold conditions and derisking set the stage for a strong pivot back to equities once the 90-day reciprocal tariff pause was announced, while economic resilience supported earnings confidence.”
With the S&P 500 again approaching historically high valuations, Morgan Stanley Wealth Management sees investment opportunities in the healthcare sector amid the recent rotation into cyclical stocks, according to Shalett.
“Health care—namely, medical equipment, devices and supplies, and distribution logistics —remains one of our favored fishing ponds for value,” she said.
Healthcare XX:SP500.35 has been the worst-performing S&P 500 sector in 2025, according to a Bespoke Investment Group note emailed Monday ahead of the U.S. stock market’s opening bell.
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Consumer discretionary XX:SP500.25 was the only other sector in the red year to date, while six of the S&P 500 index’s 11 sectors were beating the index, the Bespoke chart above shows.
“Yes, technology is one of the sectors that’s ahead of the S&P 500, but other non-tech sectors like industrials, utilities, financials, and materials have also outperformed” this year, Bespoke said in the note.
The S&P 500, which has an outsize weight to Big Tech stocks, has climbed 8.6% in 2025 through Monday. In a sign that this year’s rally hasn’t been just about Big Tech, shares of the Invesco S&P 500 Equal Weight ETF RSP, an exchange-traded fund that equally weights stocks in the index, has risen 6.5% this year over the same stretch, FactSet data show.
Meanwhile, U.S. businesses have been reporting this month their latest quarterly earnings, with results from Big Tech companies Meta Platforms Inc. META, Microsoft Corp. MSFT, Amazon.com Inc. AMZN and Apple Inc. AAPL scheduled for this week, according to the Bespoke note.
“We hope you had a restful weekend, because the last four days of July and the first trading day of August are going to be jam-packed with earnings and economic data,” Bespoke said.
The Federal Reserve will wrap up its two-day meeting on monetary policy on Wednesday with a decision on where it’s setting interest rates. The U.S. jobs report for July will be released Friday, while data on manufacturing and consumer sentiment will be released that same day.
More imminently, Tuesday’s U.S. economic calendar includes fresh reports on areas such as job openings and consumer confidence.
The U.S. stock market closed mostly higher Monday, with the S&P 500 eking out a gain of less than 0.1% to notch a sixth straight record peak. The tech-heavy Nasdaq Composite COMP rose 0.3% to book a fresh all-time closing high, while the Dow Jones Industrial Average DJIA slipped 0.1%.
The S&P 500 ended Monday up 28.2% from its April 8 low, according to Dow Jones Market Data.
“The stock market’s stunning rebound and resilience have again emboldened equity investors,” said Shalett, who pointed to their optimism about ‘Goldilocks’ economic conditions. But she cautioned against “buying the market” through the passive S&P 500 index, saying “complacency is elevated, and valuations are rich.”
Shalett said to consider stocks with “earnings and cash-flow upside-surprise potential,” which may be found among “select tech hardware and services names, industrials, financials, energy and parts of health care that are policy beneficiaries amid higher structural volatility and real rates, and a weak U.S. dollar.”
