Stock futures are being whipsawed by volatility, as the conflict in Ukraine intensified overnight and into Tuesday, with heavy bombardment of major cities by Russian forces.
Russian President Vladimir Putin and his government thus far remain undeterred neither by the growing humanitarian crisis, nor the threat of economic collapse as a mountain of sanctions grow.
For investors, navigating an environment that is filled with more uncertainties than usual, the wisest path forward is to not get too overconfident about the future and what their investments can deliver, says a team at Morgan Stanley, led by U.S. equity strategist Mike Wilson.
In our call of the day, Wilson and the team say the best companies out there right now are able to “deliver on operational efficiencies.”
“Our work suggests the market is paying up for companies that have a better chance of delivering earnings in a more challenging operating environment,” said Wilson. “Rather than growth or defensiveness, the market wants operational efficiency defined as low capex/sales growth and employee turnover.”
He has got a list of companies that meet that criteria, but before we get to that, note that Wilson is worried about increasingly at-risk earnings forecasts. “First, the negative-to-positive guidance ratio for 1Q has spiked to 3.6 — the highest since 1Q16, when we were mired in a global manufacturing recession,” he said.
The ratio never even reached that high during the COVID-19 recession, while earnings breadth is falling fast and approaching negative territory.
“In a world where valuations remain elevated and earnings risk is rising, last
week’s tactical rally in equities will likely run out of momentum in March as the Fed
begins to tighten in earnestand the earnings picture deteriorates,” warned Wilson.
Back to his call, Wilson repeated that companies will likely have a tougher time meeting earnings expectations this year than investors think. Here is his chart showing that preference for operational efficiency.
Below is a list of high achievers who are all members of the top 1,000 U.S. stocks by market cap, with operational efficiency in the top 20% of their sector and rated overweight at Morgan Stanley. Coca-Cola KO, -0.97%, Walt Disney DIS, -0.72%, Chevron CVX, +2.58%, Wells Fargo WFC, -1.37% and Qualcomm QCOM, +0.62% are at the top of that list.
Bombing has intensified in Ukraine’s second-largest city Kharkiv, as a massive convoy of Russian forces closes in on the capital, Kyiv. Experts say to brace for more distressing images and videos to come, and that is even after Russian and Ukrainian delegates agreed late Monday to continue talks.
Corporate backlash against that invasion continues, with Warner Bros. T, -0.92% and Disney DIS, -0.72% halting new releases in Russia. Meanwhile, more than $500 billion in Russian securities have now been frozen.
Target TGT, +0.28% is soaring on strong results and upbeat forecasts from the retailer. Kohl’s KSS, -2.22%, Domino’s DPZ, +0.52% and AutoZone AZO, -0.07% will also report, with Salesforce CRM, +1.17%, HPE HPE, -0.62%, AMC Entertainment AMC, +6.80% and First Solar FSLR, +6.52% coming after the market close. HP HPQ, -0.26% is also up, following results.
The Institute for Supply Management manufacturing index and construction spending are due later, followed by President Joe Biden’s State of the Union speech, which will likely cover the war, the economy and COVID-19, coming this evening.
As Fed Chair Jerome Powell’s appearance on Capitol Hill looms for Wednesday, Fed fund futures have completely priced out the possibility of a 50 basis-point rate hike in March.
Stock futures YM00, -0.70% ES00, -0.67% NQ00, -0.66% are down and oil CL00, +4.63% is surging as investors again gravitate toward havens such as bonds TMUBMUSD10Y, 1.780%, gold GC00, +1.13% and the dollar DXY, +0.45%. Bitcoin BTCUSD, +6.91% and other cryptocurrencies continue to climb after Monday’s rally.
The Russian ruble USDRUB, -4.95% is clawing back ground from a massive selloff seen in recent days. Here’s a good explanation of what is going on:
These were the top-searched stock tickers on MarketWatch as of 6 a.m. Eastern:
The first full-dress Mardi Gras in New Orleans since 2020 is on.
Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.
Want more for the day ahead? Sign up for The Barron’s Daily, a morning briefing for investors, including exclusive commentary from Barron’s and MarketWatch writers.