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Stock markets are emerging from the worst start to a year in half a century. But the volatility is far from over and investors should prepare for further risk to earnings ahead, Morgan Stanley says. The S & P 500 notched its worst first half since 1970 while the Nasdaq Composite fell deep into a bear market. Record-high inflation spurred an aggressive rate-hiking cycle from the Federal Reserve and war in Ukraine sent oil and grain prices rocketing higher. Rates have fallen in recent weeks amid a string of disappointing economic data, while forward earnings estimates on the S & P 500 and Nasdaq 100 are more than 20% above the post-global financial crisis trend, Morgan Stanley noted. However, investors should regard the dip in yields “as more of a growth concern rather than as potential relief from the Fed/inflation pressures,” wrote analyst Michael Wilson. “But until earnings estimates are cut to more reasonable levels or valuations reflect that risk, the bear market is not complete, in our view,” he said. “2Q earnings season should be a good start in that regard.” With further risk on the horizon, Morgan Stanley shared a list of stocks with stable earnings to help clients insulate their portfolios in the months ahead. The picks are loved by the bank, among the top 1,000 U.S. stocks by market cap and boast earnings stability in the top 20% of their sectors. “Companies with stable earnings tend to have lower estimate dispersion, lower ROE volatility, and lower sales growth volatility,” Wilson said. “The market has been rewarding companies with stable earnings, sales growth and more consistent Street estimates.” Here are some of the names that made the list: Technology stocks took a massive hit during the first half of the year as investors moved out of growth companies and fears of a recession mounted. Microsoft and Meta Platforms have plummeted 23% and 51%, respectively, but nonetheless made Morgan Stanley’s stable earnings screen. The bank recently named Meta among a list of technology stocks to buy if the economy continues to slow . Meanwhile, Microsoft reigned among analysts’ favorite Dow stocks for the second half of 2022 , according to a recent screen from CNBC Pro. Energy stocks rallied earlier this year as oil and gas prices surged. Exxon Mobil, which is trading up 32% this year, also made Morgan Stanley’s list. Last month, the integrated oil company hit a new all-time high of $104.59 , punching above $100 for the first time since 2014. Athletics apparel retailer Lululemon Athletica , Walmart , BlackRock and beer and wine maker Constellation Brands were also among the bank’s stable earnings stocks.
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