In a challenging environment, these stocks are delivering what the market wants to see, says Morgan Stanley

Stock Market


Stock futures are being whipsawed by volatility, as the conflict in Ukraine intensified overnight and into Tuesday, with heavy bombardment of major cities by Russian forces.

Russian President Vladimir Putin and his government thus far remain undeterred neither by the growing humanitarian crisis, nor the threat of economic collapse as a mountain of sanctions grow.

For investors, navigating an environment that is filled with more uncertainties than usual, the wisest path forward is to not get too overconfident about the future and what their investments can deliver, says a team at Morgan Stanley, led by US equity strategist Mike Wilson.

In our call of the dayWilson and the team say the best companies out there right now are able to “deliver on operational efficiencies.”

“Our work suggests the market is paying up for companies that have a better chance of delivering earnings in a more challenging operating environment,” said Wilson. “Rather than growth or defensiveness, the market wants operational efficiency defined as low capex / sales growth and employee turnover.”

He has got a list of companies that meet that criteria, but before we get to that, note that Wilson is worried about increasingly at-risk earnings forecasts. “First, the negative-to-positive guidance ratio for 1Q has spiked to 3.6 – the highest since 1Q16, when we were mired in a global manufacturing recession,” he said.

The ratio never even reached that high during the COVID-19 recession, while earnings breadth is falling fast and approaching negative territory.

“In a world where valuations remain elevated and earnings risk is rising, last
week’s tactical rally in equities will likely run out of momentum in March as the Fed
begins to tighten in earnestand the earnings picture deteriorates, ”warned Wilson.

Back to his call, Wilson repeated that companies will likely have a tougher time meeting earnings expectations this year than investors think. Here is his chart showing that preference for operational efficiency.

Below is a list of high achievers who are all members of the top 1,000 US stocks by market cap, with operational efficiency in the top 20% of their sector and rated overweight at Morgan Stanley. Coca-Cola KO,
Walt Disney DIS,
Chevron CVX,
Wells Fargo WFC
and Qualcomm QCOM
are at the top of that list.

The buzz

Bombing has intensified in Ukraine’s second-largest city Kharkiv, as a massive convoy of Russian forces close in on the capital, Kyiv. Experts say to brace for more distressing images and videos to come, and that is even after Russian and Ukrainian delegates agreed late Monday to continue talks.

Corporate backlash against that invasion continues, with Warner Bros. T
and Disney DIS
halting new releases in Russia. Meanwhile, more than $ 500 billion in Russian securities have now been frozen.

Read: Ukraine continues to win the information war

Target TGT
is soaring on strong results and upbeat forecasts from the retailer. Kohl’s KSS,
Domino’s DPZ
and AutoZone AZO
will also report, with Salesforce CRM,
HPE HPE,
AMC Entertainment AMC
and First Solar FSLR
coming after the market close. HP HPQ
is also up, following results.

Chevron CVX
is climbing, after the oil giant doubled its stock buyback plan to up to $ 10 billion a year.

The Institute for Supply Management manufacturing index and construction spending are due later, followed by President Joe Biden’s State of the Union speech, which will likely cover the war, the economy and COVID-19, coming this evening.

As Fed Chair Jerome Powell’s appearance on Capitol Hill looms for Wednesday, Fed fund futures have completely priced out the possibility of a 50 basis-point rate hike in March.

The markets

Stock futures YM00

ES00

NQ00
are down and oil CL00
is surging as investors again gravitate towards havens such as bonds BX: TMUBMUSD10Y,
gold GC00
and the dollar DXY.
Bitcoin BTCUSD
and other cryptocurrencies continue to climb after Monday’s rally.

Read: Cybersecurity stocks gain on fears of ‘a significant ramp-up of cyberwarfare’ related to Russian invasion of Ukraine

And: Russia may struggle to use cryptocurrencies to evade Western sanctions

The chart

The Russian ruble USDRUB
is clawing back ground from a massive selloff seen in recent days. Here’s a good explanation of what’s going on:

Uncredited

The tickers

These were the top-searched stock tickers on MarketWatch as of 6 am Eastern:

Ticker

Security name

TSLA

Tesla

AMC

AMC Entertainment

GME

GameStop

MULN

Mullen Automotive

NIO

NIO

LCID

Lucid

AAPL

Apple

DWAC

Digital World Acquisition

FB

Facebook

Random reads

Ukrainian sports stars are enlisting to fight and the government plans to sell war bonds.

The first full-dress Mardi Gras in New Orleans since 2020 is on.

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