Polarization becoming more severe? Morgan Stanley: There is no small-cap stock market in the U.S., and large-cap stocks will continue to support the market.

After the brilliant performance in the fourth quarter of 2023, small-cap stocks in the United States encountered difficulties in 2024, with large-cap stocks increasingly supporting the overall trend of the U.S. stock market. Morgan Stanley believes that the future profitability of small-cap stocks will be further squeezed, and the polarization situation may become more severe.

On February 26, a team led by Morgan Stanley analyst Nicholas J. Lentini released the "February Corporate Research." The current macroeconomic environment is different from before. Under the combined effect of tight monetary policy, loose fiscal policy, and ample liquidity in the financial markets, the survival space of small businesses may be squeezed, but this environment is conducive to the survival of high-quality large enterprises.

Morgan Stanley speculates that the performance of large-cap stocks will continue to outperform small-cap stocks in the future. Besides the economic environment factors mentioned above, operational efficiency is becoming a key focus for companies in the future, where the advantage of large-cap stocks can be demonstrated:

We hold regular micro/macro roundtable meetings with stock analysts. Analysts believe that as companies continue to cut costs and tend to use AI to improve work efficiency, operational efficiency is the focus of corporate attention, which also supports the trend of large-cap stocks.

Furthermore, Morgan Stanley believes that if the economic data overheats currently, U.S. Treasury yields rise, then large-cap stocks are better able to withstand the volatility in the bond market:

The fluctuation of the 10-year Treasury yield in the range of 4%-4.35% is supporting the rise of risk assets. However, if the PCE data to be released on February 29 or the employment data to be released on March 8 are too hot, causing the 10-year Treasury yield to break above 4.35%, then small-cap stocks, which are more sensitive to rising yields, will underperform large-cap stocks.

Companies in 2024 are most concerned with improving operational efficiency

In its corporate research, Morgan Stanley pointed out that most companies believe that profit margins will rebound starting in the second half of 2024. The rise in labor costs has become the biggest factor constraining profit margins currently, while the general confidence of small business executives remains below historical levels:

In terms of demand, companies hold a cautiously optimistic attitude towards future market demand. Most companies expect demand to bottom out in the first half of this year and rebound in the second half. Consumers still have "room for choice" in consumption, with mentions of "soft consumption" less frequent than mentions of "strong consumption." The frequency of mentions of consumer advantages or disadvantages in the market has decreased, while the frequency of "selectivity" mentions continues to rise.

To control costs, companies are reducing their hiring intentions, with mentions of layoffs increasing. Wage pressure continues to exist, with labor becoming a focal point of concern. Wages are considered one of the biggest obstacles to cost reduction in 2024, and companies generally expect wages to rise by 3-5% in 2024. Overall, the pressure on corporate costs is showing a slowing trend but remains robust. Labor shortages have eased somewhat, but wage pressures still persist. The mentions of inflation are decreasing, while mentions of deflation are increasing.

Morgan Stanley emphasizes that small businesses are facing financing pressure due to high interest rates. More and more small businesses are starting to feel the burden of high interest rates, considering it as one of their biggest challenges:

According to Morgan Stanley, companies generally believe that the key debate lies in the future pricing ability and the decrease in input costs, with the frequency of efficiency mentions reaching historical highs.

By industry, Morgan Stanley points out that the software industry has the highest proportion of mentions of "efficiency," reaching 9%, followed by the energy, machinery, and semiconductor industries, all at 5%.

In the past 90 days, among companies mentioning "labor shortages" or "labor costs," the machinery, hotel and catering, aerospace, and transportation industries are at the forefront.

Artificial Intelligence Becomes the Most Frequently Mentioned Term

Morgan Stanley states that, based on the expressions of companies in the past 90 days, the mention rate of "artificial intelligence" has reached a new high:

Morgan Stanley points out that companies generally believe that AI will improve efficiency and employee productivity, but it is still in the early stages of impacting corporate revenue and profits. 2024 is expected to be the year when artificial intelligence becomes widespread and applied across various industries. By industry, the software industry has the highest frequency of mentioning AI at 18%, followed by the semiconductor industry at 9%.

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