Morgan Stanley continues to recommend exposure to the broadening theme

Investing.com -- Morgan Stanley reaffirmed its constructive stance on market broadening trades in a note on Monday, pointing to improving earnings breadth, falling crude prices and semiconductor volatility as forces redirecting investor capital away from crowded momentum positions toward a wider set of beneficiaries.

Analyst Michael Wilson told investors that "the median S&P 1500 stock is now delivering double-digit earnings growth, the fastest pace in several years," driven by revenue growth returning atop lean cost structures.

The bank said operating leverage and earnings per share growth have reached their strongest levels since 2021, describing the dynamic as a "rolling recovery."

Morgan Stanley "continues to recommend exposure to this broadening theme through Discretionary Goods, Transports, and Regional Banks" as popular momentum trades in semiconductors and hyperscalers come under further pressure.

Wilson noted that recent semiconductor volatility is making historically high exposure levels "harder to maintain, even in the more recent spot-up/vol-up backdrop," and suggested semis may be following a pattern similar to silver stocks earlier in the year.

On oil, Morgan Stanley believes falling crude prices are likely to further enhance the broadening trade, with the bank having maintained a more bearish view on oil than consensus for the past one to two months, driven by leading signals from the Brent-WTI spread rather than U.S.-Iran deal expectations.

The bank's primary near-term concern is liquidity, warning that tightening conditions from shrinking Treasury buybacks "just as equity supply and the real economy needs more" presents a risk for indices and momentum trades.

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