US Markets

Why 0% earnings growth calls are wrong: Morgan Stanley

Closet consumer bets
Closet consumer bets

Morgan Stanley believes companies in the can produce 3 to 4 percent organic earnings growth for the year, powered by strong performance in the consumer discretionary and financial sectors, the firm's chief U.S. equity strategist said Monday.

Adam Parker said he was optimistic about the market and doesn't see high risk of an impending recession, signs of corporate excess or imminent trouble in credit markets beyond mid-cap energy.

"The bottom-up consensus numbers are for zero earnings growth this year, and we think that's probably not right," Parker told CNBC's "Squawk on the Street." "With two whole quarters of earnings ahead of us, you're going to see some benefits to companies that clearly will do well with lower oil and lower rates."

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In a research note Monday, Morgan Stanley reiterated its bet on consumer discretionary and said it had "modestly increased" its exposure on financials.

The firm is focused on the low-end consumer amid signs that shoppers are finally spending fuel savings in the broader economy. He noted that Amazon's first annual Prime Day on July 15 was bigger than last year's Black Friday, and Wal-Mart, the nation's largest retailer, had recently reported positive same-store sales growth.

Morgan Stanley now holds 17 percent of its portfolio in consumer discretionary and is bullish on names like Ross Stores, Williams-Sonoma and Victoria's Secret parent L Brands.

While Morgan Stanley said the biggest catalyst for financials could be an interest rate hike, big banks such as Bank of America and JPMorgan have delivered good earnings growth at a reasonable price, Parker noted.

Morgan Stanley is trying to find quality stocks that are down significantly, and has added positions in Capital One, American Express and BlackRock. "Some of that is a consumer bet also, a closet consumer bet," he said.

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Parker and his team offered a mea culpa on its energy bet, made earlier this year. Their note said U.S. oil producers had proven themselves capable of achieving the same margins with crude at $60 a barrel as they had achieved when it cost $90 a barrel. That has helped to keep supply high and delayed a rebalancing of crude oil prices.

Morgan Stanley said its bad top-down bet on energy had been offset by its stock picks, particularly Cameron International, Valero, and Phillips 66. It is removing positions in Anadarko Petroleum, Occidental Petroleum and Atwood Oceanics.

"I just worry a little bit that it's going to take longer for the oil cycle to recover, and I don't want to sit on dead money," Parker said.