19 Stocks to Buy With Big Upside in a Bear Market: Morgan Stanley

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19 Stocks to Buy With Big Upside in a Bear Market

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Morgan Stanley says to buy these 19 stocks with at least 17% upside — even though history says that US stocks could still fall another 20% as a recession strikes

US stock market traders

Stocks may fall another 20%, warns Morgan Stanley's Mike Wilson. Xinhua News Agency/Getty Images

  • Mike Wilson, the chief US equity strategist at Morgan Stanley, called the market crash.
  • The strategy chief is now warning about another 20% decline as recession risk rises.
  • Here are 19 stocks that Morgan Stanley analysts are bullish on anyways.

Morgan Stanley's Mike Wilson has long been cautious about US stocks, but he's no permabear.

In fact, Wilson was called "the biggest bull on the Street" shortly after becoming Morgan Stanley's chief US equity strategist in spring 2017, and his bullish S&P 500 price target at the time soon proved to be accurate.

But since then the strategy chief has been either lukewarm or downbeat about stocks. Many of his market calls have come to fruition — including one last fall about high inflation and low growth.

In fact, Morgan Stanley was one of only two Wall Street firms that saw stocks sliding in 2022 as growth slowed and valuations fell, though the firm can't say it predicted a 21% crash a mere six months later.

Unfortunately, Wilson now sees another 20% selloff ahead as four-decade-high inflation and the Federal Reserve's aggressive response cause the economy to weaken.

"With our view for lower multiples and earnings now more consensus, the markets are more fairly priced," Wilson wrote in a June 21 note to clients. "However, it does not price the risk of a recession , in our view, which is 15% to 20% lower."

In that same note, Wilson shared his views on what's next for the market and the economy, before listing 19 stocks that Morgan Stanley analysts think will hold up well amid the weakness.

How low can stocks go?

Stocks may have been unfairly punished in the near term, Wilson wrote, but he also doesn't think a relief rally is on the horizon, asserting that "the upside is quite limited" at current levels.

"Equity markets are very oversold, but they can stay oversold until market participants feel like the risk of recession has been extinguished or at least reduced considerably," Wilson wrote. "We don't see that outcome in the near term."

Wilson added: "We see a pretty poor risk reward over the next 3 to 6 months with recession risk rising in the face of very stubborn inflation readings. Valuations are closer to fair at this point but hardly a bargain if earnings are likely to come down and/or a recession is coming."

The key question for investors is how much further the S&P 500 could fall if the economy falters. If the US is headed for a recession, then history suggests that stocks are only 60% of the way to a bottom, Wilson noted. That precedent — and a 14% earnings contraction that typically occurs during a downturn — is reflected in Wilson's downside range of 2,900 to 3,100 for the S&P 500.

And even if the Fed is able to pull off a so-called "soft landing" by bringing down inflation without causing a recession, Wilson is still confident that there would be a "fairly rare" 3% to 5% decline in earnings revisions that sends the S&P 500 to 3,400 or 3,500.

Remarkably, earnings expectations haven't fallen this year despite the onset of a bear market . The only other time that's happened was in 1998, Wilson noted, a year in which the market experienced a 19% decline with virtually no downward revisions to earnings. That scenario is unlikely to repeat, he wrote.

"What we can say with more certainty today versus a few months ago is that earnings estimates are too high even in the event a recession is avoided," Wilson wrote.

Morgan Stanley might be bearish about stocks, but the firm's economists still believe that there's only a 35% chance of a recession in the next year. However, that's still up significantly from the previously projected mark of 20%, and Wilson wrote that he'd assign an even higher chance of a contraction, given his "more negative view on the consumer and corporate profitability."

19 safe stocks to consider

Even in a turbulent market environment, there are still investing opportunities. Wilson's note included a list of 19 stocks that the firm's analysts have assigned an overweight rating to, and each had at least a 17% upside between their current prices and the analysts' price targets heading into June 21.

Morgan Stanley analysts were also confident that these companies' earnings would be "relatively insulated" from the risk of interest rate hikes during a growth slowdown and therefore would "have the potential to see upward revisions" heading into 2023, Wilson wrote.

Below are the 19 overweight-rated stocks that Morgan Stanley analysts think can do well in a downturn, along with the ticker, market capitalization, and price-to-earnings (P/E) ratio of each.

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