Andrew Slimmon, Managing Director at Morgan Stanley Investment Management, discusses Tesla's current situation and the outlook for the technology market and cyclical sectors.

Tesla, often the centre of attention, has seen its share price fall by 33% this year, a move that Slimmon attributes to the company's fundamentals rather than a change in market trends.

He sees the divergence in the performance of the major technology companies, dubbed 'The Magnificent 7', as a sign of market health, indicating that share prices now more accurately reflect the economic reality of the companies. This bifurcation is seen as a positive development, moving away from the momentum movements that previously dominated.

Slimmon stresses the importance of selection in the technology sector, highlighting semiconductors, which should benefit from the Chips Act. At the same time, he recommends not neglecting cyclical sectors such as energy, financials, materials and industrials, because of their potential in an environment of high inflation and interest rates.

He expresses concern about the recent surge in oil prices, seeing it as an indicator of rising equity market anxiety over geopolitical tensions. This could signal rising inflation, which would have implications for the Fed's monetary policy.

According to Slimmon, if the Fed keeps rates on hold, this could validate the strength of the economy and support the equity market. However, he warns that multiple rate cuts could indicate hidden economic weaknesses, adversely affecting the outlook for equities.

Finally, Slimmon compares Morgan Stanley's forecasts with those of UBS, which anticipates five rate cuts between now and 2026 as growth slows. Nevertheless, he remains optimistic about the economy's resilience and suggests that cyclical sectors could be wise investments due to their pricing power and attractive valuation relative to growth stocks.

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