Morgan Stanley CIO: A Biden Victory is Favorable for Bonds, Trump Administration More Beneficial for Economic Growth

Bond markets could see a positive impact in the event of President Joe Biden’s reelection, as his administration may look to raise taxes to offset government spending, stated Morgan Stanley’s chief investment officer on Wednesday.

Conversely, if former President Donald Trump were to win the November 5th election, it could lead to better economic growth but a less favorable outlook for bonds, according to Morgan Stanley CIO Michael Wilson in an interview with the Reuters Global Markets Forum.

Wilson mentioned that in the past 12-18 months, investors have shown preference towards high-quality large-cap stocks that have experienced earnings revisions, leading to increased alpha for these stocks.

Alpha, a measure of a fund manager’s performance, reflects their ability to generate returns exceeding a benchmark index.

“The alpha opportunity lies more at the stock level rather than sector level,” Wilson commented.

He also highlighted the impact of earnings revisions on generating alpha for active investors, with many institutional clients taking advantage of this trend this year.

Companies and analysts revise earnings to incorporate new performance information or adjust to economic changes.

Wilson emphasized that for long-only managers, stock picking is crucial, while macro-investors and risk-parity managers are reducing bond allocations in favor of commodities and currencies.

Data from LSEG IBES showed that out of 1,379 U.S. companies reporting earnings in the week ending June 7, 788 saw an upward revision in estimates compared to 591 with downward revisions.

Despite stronger-than-expected U.S. first-quarter earnings growth, executives at smaller-cap companies have indicated weaker consumer demand and limited loan growth.

Morgan Stanley continues to favor large-cap companies, with Wilson stating, “Given the economic and political environment, we should focus on stocks with positive earnings revisions, particularly large-cap quality stocks.”

According to LSEG data, of the 496 S&P 500 companies reporting earnings until June 7, 78.6% surpassed analyst estimates, exceeding the long-term average of 66.7%.

Wilson stressed the importance of earnings growth for stocks, particularly identifying companies capable of growing earnings and cash flow faster than inflation and expectations.

“The challenge now is that this aspect is well understood, leading to expensive valuations for growth-oriented stocks,” he added.

Regarding political implications, Wilson emphasized the significance of immigration policies under both possible administrations.

He noted that a Biden win would be more favorable for labor supply and inflation, while a Trump victory could result in stricter border regulations, potentially rekindling inflation concerns.

Wilson predicted that the energy and financial sectors, along with small-cap companies, would benefit from a Trump presidency, while large-cap growth companies could see gains with a potential Biden victory.