MORGAN STANLEY: Amazon's explosive growth is masking a fault line in one of the market's hottest sectors (AMZN)

Jeff Bezos

Amazon makes up 35% of the consumer-discretionary sector, one of the stock market's strongest performers of the past decade.
However, the company's growth is masking a more "perilous" future through the end of this cycle for other stocks in the sector, according to Mike Wilson, Morgan Stanley's chief US equity strategist.
He reiterated his "underweight" rating on the sector in light of the recent reshuffling of S&P 500 sectors.

It's not unusual for a handful of stocks to bear much of the burden of keeping the market afloat.

But on a smaller scale, specifically in the consumer-discretionary sector, Amazon's success may be distracting from the danger lurking among its peers, according to equity strategists at Morgan Stanley.

The sector has been a juggernaut of investor returns this year, rallying 20% and second only to information technology. It also ranks second-best to tech over the past decade.

However, Mike Wilson, Morgan Stanley's chief US equity strategist, has slapped an "underweight" rating on the sector that has little to do with Amazon, which constitutes 35% of the entire index. That's because Amazon's performance can only do so much to impact the sector's, Wilson said.

"While the secular growth story for Amazon is well understood, we reiterate our point that the consumer wallet is likely to see decelerating growth heading into 2019, meaning competition intensifies, leading to more narrowness within the sector, a dynamic we view as ultimately unhealthy and likely to create more volatility," Wilson said in a client note on Monday.

Amazon, which recently became the second US company to hit a $1 trillion market cap, has helped move the needle on its sector's "extreme valuation," Wilson added. He said the sector's aggregate price-to-earnings ratio now trades near a 35% premium to the rest of the market, more than two standard deviations above the post-financial-crisis average.

The sector's performance is outpacing earnings, and this trend is unsustainable in Wilson's view.

10 1 18 discretionary COTD

Wilson reupped his sector call to clients in light of a major reshuffling of the stock market that went into effect last week Friday. MSCI and S&P tweaked the Global Industry Classification Standard by creating a new communication-services sector. In addition, they moved some media companies, including Netflix, out of consumer discretionary and into the new sector, to better reflect their business models.

These changes left the consumer discretionary sector as having the most growth-oriented stocks on the market, meaning those that tend to rise and fall in tandem with the economy, according to Wilson. By his count, 74% of the stocks in consumer discretionary are growth, and just 9% are value.

And it's another reason why he's wary of the group. Strategists at Morgan Stanley recently flagged several reasons why they think the economic boom may slow soon, including fading benefits from personal tax cuts and rising interest rates.

"Amazon may keep the sector supported for a time, and we admit will likely be the last stock in the group to crack this cycle, but the path from now to cycle end for the median discretionary stock is likely perilous," Wilson said.

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