Why U.S. stocks look set for fourth-quarter rally led by Big Tech, says Morgan Stanley portfolio manager

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‘The ideal setup going into earnings season is when there’s a high level of worry, which there is now,’ says Morgan Stanley’s Andrew Slimmon

The U.S. equities market appears set for a rally in the fourth quarter after weakening in the past two months, with megacap stocks potentially leading the way up, according to a portfolio manager at Morgan Stanley.

“The economy is slowing, but I don’t think it’s falling off a cliff,” said Slimmon. “People have jobs,” he said. And “when I listen to companies, they’re still looking for workers.”Meanwhile, long-term Treasury yields have been retreating this week from levels seen after their rapid surge rattled equities, taking some pressure off the U.S. stock market.

Traders in the federal-funds-futures market are expecting the Fed will decide at its November policy meeting to hold its benchmark rate steady at its current level of 5.25% to 5.5%, according to the CME FedWatch Tool. Fed-funds futures also pointed on Wednesday to the Fed keeping its policy rate at the level at its meeting in December.

The yield curve univerting because of a climbing 10-year Treasury yield may have “a longer tail” in terms of preceding a recession, he said, but “ultimately that’s a bad sign also because it snuffs out the ability of companies to continue to invest in their businesses.” That’s because higher 10-year yields translate into higher financing costs for corporate borrowers.

So-called Big Tech stocks include Apple Inc. AAPL, +0.47%, Microsoft Corp. MSFT, +0.94%, Google parent Alphabet Inc. GOOG, +1.65% GOOGL, +1.68%, Amazon.com Inc. AMZN, +1.40%, Nvidia Corp. NVDA, +1.78%, Facebook parent Meta Platforms Inc. META, +1.48% and Tesla Inc. TSLA, -0.07% are outperforming the S&P 500 so far this month.

Read: Why bank stocks are the ‘Achilles’ heel’ of markets as bears worry high bond yields may ‘break’ something

 

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