Ease up on Mag 7, ‘‘Trump trade’ exposure as inflation flare-up looms: MS Wealth Mgmt

Morgan Stanley Wealth Management recommended investors think about lightening exposure to mega-tech stocks and recently outperforming “Trump Trades,” as it sees downside risk in an inflation pick-up next year.

The S&P 500 (SP500) has climbed 5% since the November U.S. election, and is up +27% this year, “on exuberance about perceived pro-growth policies in Washington,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. Magnificent 7 tech heavyweights including Tesla (TSLA) along with some so-called “Trump Trades” such as bitcoin (BTC-USD) have marched up ahead of Donald Trump’s return to the White House in January.

But equity investors appeared tied to the idea that the U.S. economy is “operating in an inherently globalized, disinflationary world,” she said. “We think we are likely in the process of major regime change, however, whereby economic growth is reflationary,” with two key drivers of disinflation – globalization and immigration – being in retreat, she said in a note Monday.

For some protection, investors should “consider eliminating large concentrations in the Magnificent Seven and other recent ‘Trump trade’ outperformers via tax-loss harvesting,” MS Wealth Management said. “We believe that post-election euphoria will likely normalize, growth will gradually slow to a soft landing and profit will disappoint, favoring bonds over stocks on a risk-adjusted basis.”

Stock investors, as well as the Fed, have “shrugged off” a three-month re-acceleration in inflation, and at the same time, stock analysts are lowering earnings expectations and economists have halved their rate-cut projections for 2025, Shalett said.

“Policy dynamism is likely to produce new market leadership in 2025, with stock picking critical,” she said.

MS Wealth Management said it favors:

• -Financials
• -Energy,
• -Residential real estate
• -Domestically focused industrials and branded-consumer goods manufacturers
• The Health Care sector “is now oversold,” it said.

Investors can track the S&P 500 (SP500) via ETFs including: (SPY), (UPRO), (VOO), (SH), (IVV), and (RSP). Among Financials ETFs: (XLF), (IYF) and (FNCL).

Here are a few Energy ETFs: (XLE), (VDE), (XOP), and (IXC), and some Health Care ETFs: (XLV), (VHT), (IHI), and (FXH).