Why investors should buy industrial stocks now as a valuable market driver deteriorates, Morgan Stanley says

A key driver of stock-market bullishness is deteriorating, although there are still opportunities available, Morgan Stanley wrote in new research.

The firm is referring to earnings-revision breadth, which enjoyed an increase that coincided with a rally in small-cap stocks in recent weeks.

The chart below shows a deceleration in earnings-revision breadth for S&P 500 companies in recent months:

"This does not offer support for a broad cyclical rotation," Morgan Stanley analysts wrote. "Instead, we recommend being more targeted within cyclicals."

The firm highlights industrial stocks in particular for two reasons: the relative attractiveness of their current valuations, and macro data that's shown signs of stabilizing.

Upcoming quarterly earnings reports could be a catalyst for these stocks, given the outsized impact beats have had on share prices.

"Stocks are being rewarded for delivering," the analysts said.

The analysts, led by CIO and chief US equity strategist Mike Wilson, say earnings revision breadth is trending lower because areas like autos, materials and consumer services have cyclical seasons, and are entering their downturn period.

Industrials, meanwhile, have more stability and are thus a safer bet as earnings revision breadth dips.

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