We recently compiled a list of Morgan Stanley’s Best Stock Picks: 15 Stocks To Own For 2025. In this article, we are going to take a look at where M&T Bank Corporation (NYSE:MTB) stands against Morgan Stanley’s other stock picks.
The tail end of 2024 is seeing a market shift in the stock market as the Federal Reserve has finally signaled that interest rate cuts are on the horizon. This means that cheaper capital might be on the horizon, with the rate cuts coming just as the labor market starts to feel the pinch through lower growth.
It also means that consumer spending can pick up if economic output remains robust. For investors, it creates an opportunity to gain an early foothold into stocks that could benefit from the new environment. On this front, investment banks have been analyzing the situation diligently for quite some time.
One bank that’s out with regular reports is Morgan Stanley. It releases monthly reports that cover the latest trends in the economy and the stock market. The bank’s August report covered some recent trends. It shared that the labor market was one of its most closely watched economic indicators as it was “vulnerable to a further deceleration in economic activity.” To explain why, the bank shared that US excess labor supply, that is the demand minus supply, was at pre pandemic levels that had sustained since 2018. This implies that employers no longer have the incentive to offer lucrative pay packages to attract workers, which in turn leads to less money flowing into the economy to contribute to inflation.
MS added that the three month national unemployment average was 0.5% above the 12 month average, which is a warning bell for the economy. This is because according to one of the most widely used recession indicators, the Sahm Rule, a recession has started once the rate is 0.5% or higher than the 12 month average. MS is not the only one that is ringing warning bells on this front, as JPM also confirmed in early August that the rule was triggered when the unemployment rate jumped to 4.3%. However, it did add that we “do not think a recession is imminent” and “remain constructive on U.S. equities despite increased volatility, and see opportunity to lock in rates before they fall.”
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Returning to MS, it also sees an opportunity in the battered commercial real estate market. It cites the commercial real estate cap rate, which is the rate of return based on its income generation capability, to argue that commercial real estate valuations are currently depressed enough to warrant an investment. The office real estate market had a cap rate of 9% in March 2024 as per MS, for a two percentage point and three percentage point lead over retail and residential real estate, respectively. As for the stock market, the bank shared in August that it still prefers large cap stocks (an important point as you’ll find out when you check out the stocks in this piece).
The bank believes that small caps “are lower in quality, more volatile and carry greater exposure to cyclical sectors relative to large cap,” meaning that their outperformance “requires economic growth acceleration with lower interest rates.” MS warned that “softer economic data may constrain” small cap performance. In terms of data, it argues that small cap performance is dependent on bond yields. This data set shows that when we assume an index value of 100 for US small caps had led benchmark S&P stocks except the Magnificent 7 at a time when 10 year US bond yields were around 1.5% in July 2021, the indexed returns dropped to 90 in July 2023 when the yields were approximately 4.3%.
August’s final week was pivotal for the stock market as Fed Chair Jerome Powell finally signaled that the time for interest rates had come. “The time has come for policy to adjust,” stated Powell at Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” he added.
Following the Fed Chair’s remarks, MS was out with its September report. Commenting on the economy, the bank shared that it does not “believe the economy is set to accelerate over the next few months, which makes the S&P 500 around 5650 our near-term upper bound. At the same time, the economy is not collapsing, which makes 5200 attractive and 5350 seem fair. We plan to trade around the ranges.” MS also shares key details for the unemployment rate, which are important when analyzed in tandem with the Sahm Rule. It comments that higher immigration “may be supporting a higher labor force participation rate, which in turn would contribute to a higher reported unemployment rate. From this perspective, a higher unemployment rate is not signaling weakness but rather an increase in the labor supply that would help bring inflation down without affecting growth.”
Subsequently, the bank believes that the percentage of total unemployed accounted for by people who lost their jobs (Job Losers) and the number of total layoffs (Challenger Layoffs) might be more relevant when analyzing the labor market. Job Losers currently sit at 50%, while Challenger Layoffs are less than 50,000 after having jumped to 100,000. In short, this paints a more robust labor market picture that might not signal a recession as the Sahm Rule might have suggested.
Remaining bearish on small caps, it believes that the “window for small cap outperformance is too narrow – requiring “Goldilocks” growth and inflation.” This sentiment is also echoed in the bank’s Vintage Values 2025 stock report, where it comments that its strategists “currently recommend avoiding small caps, and Vintage Values 2025 reflects that view. It skews heavily toward large-cap stocks: 80% of the names are classified as either mega-cap or large-cap.” Mind you, this sentiment was also echoed in the 2024 report, verbatim.
Our Methodology
To make our list of MS’ top stocks for 2025, we ranked MS’ Vintage Value 2025 stock picks by their share price percentage upside based on the bank’s price target.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A busy financial advisor talking to a client in their office.
M&T Bank Corporation (NYSE:MTB)
Number of Hedge Fund Holders In Q2 2024: 34
Share Price Target Upside: 30%
Share Price Target: $220
M&T Bank Corporation (NYSE:MTB) is a regional bank headquartered in Buffalo, New York. It is one of the biggest banks of its kind in terms of assets, with the figure sitting at a cool $208 billion as of December 2023. M&T Bank Corporation (NYSE:MTB) has benefited from high interest rates, as they have allowed it to grow its revenue from $5.9 billion in 2020 to $9.3 billion in 2023 for a 57% growth. M&T Bank Corporation (NYSE:MTB) has some exposure to the troubled commercial real estate sector though. As of Q2, its CRE loans were $31.5 billion which increases the risk of headwinds in case real estate defaults pick up particularly if there is a recession. Additionally, M&T Bank Corporation (NYSE:MTB)’s shares could suffer in the future if rate cuts are delayed. This is because the bank’s net interest income (NII) is struggling as it faces off with high deposit costs which will continue to be sticky in case of higher rates.
On the flip side, lower rates could also reduce M&T Bank Corporation (NYSE:MTB)’s NII. Here’s how management is preparing in advance for this:
“Higher for longer rates in the first half of the year allowed us to take additional actions to protect NII from lower interest rate environment.
For example, in the first half of the year, we shifted $3 billion of cash into securities and added $5 billion in forward starting cash flow hedges, which became active in 2025. During — or further, we expect that the downside in interest-bearing deposit beta will be approximately 30% to 40% in the first couple of rate cuts.”
Overall MTB ranks 1st on our list of Morgan Stanley’s best stock picks for 2025. While we acknowledge the potential of MTB as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MTB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.