(Reuters)Wall Street banks begin reporting first quarter earnings on Tuesday morning.
In a note Monday, Morgan Stanley's chief US equity strategist Adam Parker highlighted a major upgrade in the firm's view of financial stocks — one it hasn't had since before the financial crisis.
"Our most substantial change and message in today’s work is to upgrade the financial sector from equal weight to overweight," Parker wrote. "This is our first time being overweight financials in the last seven years.”
Parker noted three reasons, with charts, as to why the bank is changing its portfolio weighting.
First, the financials sector should post the most year-over-year growth in shareholder return following the mostly successful stress test results.
Secondly, banks historically outperform in periods of dollar strength, and are the only stocks that have a statistically positive relationship to a stronger greenback, according to Parker.
Thirdly, bank stocks have an inverse relationship with the 10-year yield. "We like the price action recently and our expectations of reasonable risk-reward related to the slope and level of the curve,” Parker wrote.
First quarter earnings growth in the financials sector is projected at 8.2% according to FactSet. That puts it in second place behind Heath Care stocks.
Wells Fargo and JPMorgan kick off earnings for Wall Street banks before the market open on Tuesday.
Morgan Stanley forecasts the S&P 500 will continue its rally through the second quarter, with a year-end target of 2,274.
More From Business Insider