- Morgan Stanley advises shifting to services stocks amid tariff concerns.
- Services sectors Wilson highlighted include software, financials, consumer services, and media.
- Trump announced 25% tariffs imposed on Canada, and 10% tariffs on China.
Worried about tariffs hurting your stock portfolio? There’s an easy fix, Morgan Stanley says: Just lean away from industries that rely on importing goods.
In a client note on Monday morning, Mike Wilson, the bank’s chief investment officer and top US equity strategist, said that his team is partial to services-oriented areas of the market.
“Tariffs reinforce our preference for services industries,” Wilson wrote, adding, “We would expect the market to rotate further toward services given recent trade policy implementation.”
Wilson highlighted four services sectors he’s particularly bullish on: software, financials, consumer services, and media and entertainment.
The comments came as US stock indexes plummeted on Monday after President Trump’s tariffs went into effect over the weekend. Trump initially announced 25% tariffs on all goods imported from Mexico and Canada, and 10% tariffs on goods from China. But Trump temporarily paused his tariffs on Mexico on Monday when the country said it would send 10,000 troops to its border with the US to help slow illegal crossings. A similar pause was reached with Canada. Trump has also threatened to impose tariffs on the European Union going forward.
But Wilson’s favoring of services stocks goes beyond tariffs. He said services industries would see the largest efficiency increases thanks to AI, something that is already showing up in performance. The median stock among AI adopters in the services industries is up 2024 over the last 13 months, compared to 9% for the median S&P 500 stock. Even including non-AI adopters, the median services industries stock is up 17%, he said.
“This structural tailwind strengthens the case for favoring services industries beyond the cyclical drivers that are supporting these pockets of the market (stronger pricing power, stronger earnings revisions and more limited tariff headwinds),” Wilson wrote.
One further recent positive catalyst for AI adopters is DeepSeek’s R1 chatbot, which came out in late January.
“Optimizing GenAI models is not a new phenomenon, but what this news cycle appeared to do is turn investors’ focus toward the idea that cheaper models are likely to increase adoption and drive efficiencies,” Wilson wrote. “Further, it drew market participants’ attention to the significant value in the application layer.”
Software and media and entertainment are particularly well-positioned to reap the benefits of AI adoption, he said.
Exchange-traded funds are one way to gain diversified exposure to the above areas of the market. Examples of funds that offer relevant exposure include: the SPDR® S&P® Software & Services ETF (XSW), the Vanguard Financials Index Fund ETF (VFH), the iShares Evolved US Media and Entertainment ETF (IEME), and the iShares US Consumer Discretionary ETF (IYC).
