Morgan Stanley expects the US stock market to reach new highs by mid-2024 and is optimistic about the industrial sector.

According to Stephen Parker, Head of Professional Strategy at J.P. Morgan Private Bank, the profit prospects of the stock market, especially the oil market in the Middle East, seem to be accelerating again and may reach new highs by mid-2024.

In an interview on Tuesday, Parker and Mary Ann Bartels, Chief Investment Strategist at Sanctuary Wealth, agreed that in the current environment of higher and longer interest rates, rates have reached a moderate level, which is actually beneficial to the stock market.

However, Bartels said that if the price of crude oil may exceed $100, it could have a negative impact on the market.

She said, "Rising oil prices harm profits, which is the reaction the market will eventually make, but it also harms consumers."

In addition, on Tuesday, US Treasury yields fell sharply, with the 10-year Treasury yield dropping to a one-week low. "I think the subconscious reaction is geopolitical factors," Parker said. "But I think the Fed's stance will ultimately determine the direction of interest rates."

Parker added that after news of the escalation of the conflict in the Middle East, US Treasury ETFs rebounded in early trading, "but it was actually the dovish comments from some Fed officials that drove this rally."

Regarding the stock market, Parker said, "History has provided us with a fairly clear roadmap of the impact of geopolitics on the market."

Parker explained that the market will soon turn to fundamentals. Depending on the stability of the oil market, this shift will return to the Fed, and earnings reports for this quarter are also about to be released.

"Our view is that the profit prospects look good," Parker said. "We believe that the economy hit bottom and rebounded in the last quarter and is starting to accelerate again. The fundamentals are good, which supports stocks."

Parker believes that the US economy will have a soft landing and economic growth will slow down next year, but it will not reach the level of a severe recession. He believes that the new highs in the market next year will be largely driven by profit growth rather than valuation, "although recent sell-offs have given us more cushion in terms of valuation. As long as oil prices do not skyrocket and remain high."

Parker also said that he sees pullbacks as opportunities and is bullish on the industrial sector because it has long-term policy support. He also recommends considering equal-weighted S&P exposure and mid-cap stocks.

"We know that this year's rebound was largely driven by the 'Big Seven' (Nvidia, Meta, Amazon, Microsoft, Apple, Google, and Tesla), but we believe that there is a trend of catching up in the entire market, so we are focusing on stocks with lower market capitalization rather than just small-cap stocks, as higher interest rates have a greater impact on small-cap stocks."In addition, the Technology Select Sector ETF (XLK.US) in the technology industry continues to lead the market with a series of mega-cap stocks. However, he concluded, "We hope to see a bit of rotation in market leadership, shifting from the concentrated leadership of mega-cap tech stocks to some more diverse areas of the market."

"We have always focused on semiconductors, software, and services," Bartels said. "I also agree that industrial stocks are emerging leaders, and we continue to have a positive outlook on energy stocks."