MW These are the companies that can withstand extreme tariff strain, says Morgan Stanley's Mike Wilson

By Barbara Kollmeyer

The hunt for havens is likely to increase in the wake of President Trump's surprise tariffs on Canada and Mexico, and one Wall Street bank has flagged a group of U.S. stocks that it says can get the job done perfectly.

Morgan Stanley's chief U.S. equity strategist, Mike Wilson, sees the market rotating further toward services companies - financials, software, media, entertainment and consumer services - over consumer goods amid tariff concerns. The Vanguard Financials ETF VFH, for example, gained nearly 28% last year, from 11% in 2023, and is up 6.6% to start 2024. The iShares U.S. Consumer Staples ETF IYK has been struggling since 2022, up just 2.6% last year.

"Goods-oriented industries with stronger pricing power (multi-industry/capital goods) are better positioned to manage this than industries without it (consumer discretionary goods)," Wilson told clients in a Monday note.

Wilson's preference for services companies isn't new. Last month, he highlighted strong earnings momentum for that group, citing tariff risk as a potential overhang for valuations of consumer-goods companies. The former has an additional feather in his cap, he noted - the likelihood of benefiting from broader adoption of artificial intelligence, which has seen a renewed surge of interest since China's perceived cheaper AI DeepSeek grabbed market attention a week ago.

Specifically, software, consumer services, healthcare equipment and services, financials, media and entertainment - including internet and commercial and professional services - have seen a median stock performance of 17% since the end of 2023, versus the broader S&P 1500 rise of 9%, Morgan Stanley noted.

Wilson cautioned that the market has been resilient when it comes to tariff threats over the past several weeks, which tells him that investors had been counting on a "gradual/measured approach" on China, and that Mexico/Canada tariffs either not being imposed or very short-lived. "From here, the market's previous baseline view is likely to be tested the longer these tariffs stay on," he said.

He added that when it comes to coming earnings, there has been more chatter around China's supply chain than Mexico or Canada's despite significant exports - 16% and 13%, respectively - from those countries.

"The implication is that tariff impact associated with Mexico and Canada may not be in consensus numbers to the same extent," he said. Companies that have been discussing China-related tariffs are pharma/biotech/life sciences, capital goods, tech hardware and consumer discretionary.

Those talking about Mexico tariffs are in the categories of capital goods, materials, healthcare equipment and services and tech hardware, while for Canada, discussions have been heard from capital goods, materials, healthcare equipment and services and energy, he said.

"We see underperformance resuming for China tariff-sensitive consumer goods stocks following the news over the weekend, and recommend investors favor services businesses within the consumer space," said Wilson and his team.

-Barbara Kollmeyer

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February 03, 2025 07:44 ET (12:44 GMT)

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