Investing.com -- Resilient US labor market data and the outlook for a series of quarter-point Federal Reserve interest rate cuts warrant a shift into cyclical stocks, according to analysts at Morgan Stanley.
In a note to clients on Monday, the analysts added that, following the jobs figures, investors are becoming increasingly confident that the Fed will achieve a so-called "soft landing" -- a scenario in which elevated inflation is quelled without sparking a downturn in the broader economy or employment demand.
Cyclical stocks, which are more volatile and tend to follow economic trends, should be among the best performers in equities as a result, they said.
The analysts upgraded their outlook for cyclical stocks, which can include businesses like airlines or automakers that offer discretionary items or services, versus defensive stocks to "Overweight". Defensive names can include goods and services that are broadly profitable regardless of the state of the wider economy.
On a sector level, the analysts upgraded financials to overweight, while healthcare and staples were downgraded to "Neutral" and "Underweight," respectively.
"We retain our overweight in utilities as a defensive hedge with secular growth exposure," they noted.
The US economy added 254,000 jobs last month, increasing from an upwardly-revised mark of 159,000 in August, according to a closely-watched Labor Department report on Friday. Economists had anticipated a reading of 147,000.
Meanwhile, the unemployment rate decelerated to 4.1%. Forecasts had seen the figure matching August's pace of 4.2%.
Average hourly wages rose by 0.4% on a monthly basis, faster than predictions of 0.3% but slightly slower than an upwardly-adjusted August mark of 0.5%.
The 30-stock Dow Jones Industrial Average posted a record closing high to end the prior week, while the tech-heavy Nasdaq Composite added 1.2% and the benchmark S&P 500 grew by 51 points or 0.9%.
Bets for another super-sized cut following a jumbo 50-basis point reduction last month were all but eradicated. According to the CME Group's (NASDAQ:CME) FedWatch Tool, there is now a 94.5% probability the Fed will slash rates by a more traditional quarter percentage point, and a 5.5% chance policymakers will choose to leave borrowing costs unchanged at a range of 4.75% to 5.00%.