US stock investment style shifts! Morgan Stanley provides recommended list: high-quality stocks break through as mid-cycle rotation unfolds comprehensively

Zhitong Finance APP has learned that Morgan Stanley has stated that high-quality stocks (QUAL) breaking through to a 52-week high, along with a nearly 10 percentage point gap in the breadth of earnings revisions, indicates that the painful shift of the US stock market into a "selective mid-cycle" phase is now fully underway.

Since the equal-weighted S&P 500 index peaked on August 14, Morgan Stanley's comprehensive quality factor has risen by roughly 6%, while the average individual stock has dropped by nearly 4% in the same period. Strategist Michael Wilson wrote in a report released Monday that all aspects of quality have broadly led the gains, with profitability at the forefront—as financing costs rise, investors have become increasingly selective toward companies able to maintain earnings, margins, and cash flow.

Wilson believes that the market is shifting from an early-cycle recovery led by low-quality cyclical stocks toward a mid-cycle pattern where earnings durability is more important. Since the Jackson Hole Symposium, higher rates and a more hawkish policy path have been priced in, depressing valuations across much of the market and making the S&P 500 index more resilient than the average stock.

The state of earnings revisions reinforces the quality thesis. The three-month average difference in earnings revision breadth between high-quality and low-quality stocks has reached about 10%, the second highest reading since 2010. Historically, when this difference is in the top quintile range, high-quality stocks have outperformed low-quality stocks by about 8% on average over the following 12 months.

Notably, investors do not have to pay more for this advantage. The relative valuation of the quality factor remains close to the median since 2010, with a forward P/E roughly on par with low-quality stocks at about 0.98x—making this factor breakout an attractive entry point for those betting on a continued mid-cycle rotation.

To help investors position for this transition, Morgan Stanley has screened stocks fitting this logic. The table below lists companies that rank among the top 1,000 by market capitalization, score in the highest quality quartile, have improved next-twelve-months EPS revisions over the past three months, and are rated “Overweight” by Morgan Stanley analysts.