Institutional investors more confident in soft landing, says Morgan Stanley

Institutional investors are showing renewed confidence in a U.S. soft landing, Morgan Stanley strategists said in a Wednesday note.

After holding more than 150 meetings with institutional investors in North America, Morgan Stanley’s equity strategists noted a significant shift in sentiment toward the soft landing narrative.

“We sensed far less hesitancy on the soft landing narrative than we had observed through the summer and into/during the recent growth scare,” the note states.

The focus of many investor discussions centered around how to position for this scenario, with cyclicals and rate-sensitive stocks attracting interest.

The term “goldilocks” surfaced frequently by the end of last week following the Fed’s 50 basis point rate cut, indicating an environment with moderate growth and inflation.

Investors were particularly interested in cyclical exposures, with “how to position for goldilocks?” being their primary question, Morgan Stanley says.

This shift in sentiment is a marked change from the growth scares witnessed earlier this year. The Wall Street firm had previously noted more concern over the possibility of a hard landing, but now, there was only one investor “who showed serious concern about the potential for a hard landing,” the note highlights.

Strategists emphasized the relevance of their mid-1990s playbook, drawing parallels between the current environment and the soft landing experienced during that period.

“We view the best positioning to play ‘goldilocks’ as a combination of select cyclicals with underlying fundamental drivers, rate-sensitive stocks, a sustained comeback in Europe’s quality growth Tech stocks/AI winners, and most importantly, idiosyncratic stock picking,” they wrote.