Equity markets have been rallying in the past week, with the S & P 500 benchmark briefly hitting a high of 5,500 last week before losing traction. The index has gained 15.4% year-to-date and just over 27.1% in the last 12 months. That movement has raised concerns on whether valuations are stretched, but Morgan Stanley’s Andrew Slimmon has maintained his bullish stance on the stock market. “I’m actually encouraged by the action,” the managing director and senior portfolio manager at Morgan Stanley Investment Management told CNBC’s ” Squawk Box Asia ” on Friday. “Many of the value areas did pretty well” despite the “AI selloff,” he said. The “AI buildout will continue even if the economy slows but cyclical sectors like materials, industrials or financials will get hurt,” he added. For now, Slimmon is not expecting to “see much of a correction, because you’re coming up to the end of the quarter.” “But what’s important to remember is that the S & P 500 has rallied 7 of the last 8 months and is up 40% from the October lows. So, I am confident we get some sort of correction this summer, we just don’t know the narrative that will cause it,” he wrote in notes to CNBC. Nevertheless, the portfolio manager expects that the S & P 500 will rally further in the fourth quarter of the year and end 2024 “closer to 6,000,” on the back of “high inflation [that is] not improving [and] a fear of the economy slowing.” Stocks to watch Slimmon sees several opportunities in the market. “In a month we will be into earnings reporting season again and I suspect the cyclical sectors will confirm the economy is remaining strong and the weakening thesis will be disproved,” he noted. “Earnings revisions remain extremely strong year-to-date in many sectors so I would recommend focusing on stocks that have had excellent revisions but have lagged recently because of this narrowness of breadth … This narrowness of breadth has created some excellent buying opportunities.” Slimmon is also bullish on large-cap stocks, especially those in the artificial intelligence sector, which he says can weather the seasonal shocks that come during the earnings cycle. One merit of large-cap stocks is that they “have better earnings revisions than the small-caps,” since they buy back their stocks more aggressively, he explained. “Small-caps don’t have the revisions, and they’re not buying back stocks, and I think they are being hurt more by the Fed being on hold and keeping higher rates for longer. I do suspect that when the [U.S. Federal Reserve] first cuts, you could get a burst of performance out of small-caps, but I think fundamentally, large-caps are doing better,” he added. Three stocks Slimmon likes right now include investment bank JPMorgan Chase , insurance company Progressive Corp and Irish building materials company CRH . Their “business is strong,” making them good plays, the portfolio manager said.
