Morgan Stanley’s top-rated stocks: Microsoft, UnitedHealth and Meta

Morgan Stanley says stocks with earnings stability will outperform during the US market downturn. See why Microsoft, UnitedHealth and Meta top the bank's list.

There's more pain ahead in the US stock market as the economic downturn curbs corporate profits, so buckle up. Morgan Stanley is predicting the S&P 500 index could plummet another 20% later this year should we find ourselves in a recession.

So how do you prepare for an extended slump in the stock market? Morgan Stanley and JPMorgan Chase & Co. agree that high quality businesses with earnings stability will fare better during the market downturn.

Microsoft Corp. (MSFT) UnitedHealth Group (UNH) and Meta Platforms (META) led Morgan Stanley's list of top rated stocks as the investment bank's analysts assessed the earnings risks across companies within its coverage.

Morgan Stanley estimates that forward earnings for companies in the S&P 500 and the Nasdaq 100 are still more than 20% above the post-global financial crisis trend. "Until earnings estimates are cut to more reasonable levels or valuations reflect that risk, the bear market is not complete, " Morgan Stanley equity strategists including Michael Wilson said in a note yesterday.

Microsoft's 'prudent' move in flagging forex headwinds

"Our experience is that the higher quality companies will admit the problems earlier and set expectations appropriately given the deteriorating macro environment," Morgan Stanley analysts said.

True enough, Microsoft flagged additional foreign exchange headwinds in its fiscal fourth quarter, when it reported third quarter results in early June. That could curb revenue by US$460 million, based on the impact through May, the company said.

Morgan Stanley isn't alone in its positive outlook for Microsoft. Forty-two analysts have either a "buy" or "overweight" rating on the stock, while two recommend shareholders hold on to their stake, according to data published on the Wall Street Journal website. On average, they expect US shares to rally to US$352.38, representing a 32% upside potential.

Credit Suisse analysts say Microsoft's update on its guidance was "prudent." While the Swiss investment bank lowered its full year revenue estimates for the company, it maintained its "outperform" rating on the stock, while keeping the price target at US$400.

Meta's price already reflects risk of a recession, Bank of America says

Bank of America Global Research analyst Justin Post, who has a 72% success rate in predicting the price movement for Meta Platforms, rates the stock a "buy," with a price target of US$233, a 37% upside potential from its current level, according to data on ETrade's website.

The stock has tumbled 50% this year, bearing the brunt of the tech selloff. That slump means Meta's price already reflects the risk of a recession, making it one of the best plays in the internet sector, Barron's quoted Post as saying.

The company plans to hire 30% fewer engineers this year than previously expected amid what CEO Mark Zuckerberg described could be "the worst downturns that we've seen in recent history," Reuters reported last week.

The company's conservative approach to expense and headcount growth could help protect its free cash flow, Morgan Stanley analysts said in May.

Thirty-nine out of 53 analysts who track the stock rate it either as a "buy" or an "overweight," while 13 recommend shareholders keep their stake, according to data on WSJ website. Only one analyst is recommending that clients sell the stock.

Morningstar senior equity analyst Ali Mogharabi sees Meta as "significantly undervalued," and places the company's fair value at US$384, more than double its current price of US$169.77.

UnitedHealth best-positioned, Morgan Stanley says

The healthcare sector has outperformed during previous US recessions and should do the same in the second half of this year, Morgan Stanley analysts said in a note last month. "UNH is best positioned given its diversification," they said.

CFRA analyst Paige Meyer expects UnitedHealth to achieve its goal of growing its earnings per share by 13% to 16% over the long term, despite near-term uncertainties, according to her note in April, after the company reported its first-quarter earnings.

Twenty-two out of 27 analysts who track the stock have a "buy" or "overweight" rating on the stock, according to data on the WSJ website. Momentum gauges agree with them, with 14 moving averages showing "strong buy" signals, according to TradingView's technical analysis.

Morgan Stanley's list of earnings stability top quintile also includes Exxon Mobil Corp. (XOM), Procter & Gamble (PG), Walmart Inc. (WMT), Salesforce Inc. (CRM), Nike Inc. (NKE) and International Business Machines (IBM).

At the time of publication, Luzi Ann Javier owns Meta shares and none of the other stocks mentioned in this article.