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Morgan Stanley says stick to the fundamentals as the market worries over Ukraine and the Fed

Published Wed, Feb 23 20222:47 PM EST

Tanaya Macheel @tanayamacheel

The tension brewing between Russia and Ukraine has dominated investors' focus in the past week, and Morgan Stanley says it may be time to turn attention back to something more productive. A lot of bad news about the situation in Ukraine is priced in, and the current environment of Fed tightening and slowing growth is just as important, according to the firm. But fundamentals — that is, a stock's key metrics that contribute to its value — will drive equity returns "in the coming months," Morgan Stanley said in a note to investors this week. "The correlations between S & P 500 price versus EPS, sales, and operating margin are all now in significant positive territory," equity strategist Mike Wilson said in the note. "A similar story is evident with respect to earnings revisions breadth. In other words, these factors are currently significant explainers of equity returns." Morgan Stanley analysts highlighted several names that show a high level of "stock-specific risk." This metric is based on the percentage of each stock's risk that isn't explained by traditional factors like market, size, value versus growth, quality versus junk and momentum. Each stock listed is in the S & P 500 with an overweight rating by Morgan Stanley estimates and is "more insulated from these macro rotational dynamics," Wilson said. "The Fed and rates have stolen the show as of late, but ultimately we think earnings growth are what will matter most through 1H 2022," he said in the note. Wilson added that the firm has "no particular edge in predicting what happens next in the Russia/Ukraine situation." However, "in situations like this, we look to the markets for insights, as the wisdom of crowds often has a better chance of predicting the outcome tha