“As we enter 2022, the key question for investors is to decide if they want to stay with the relative winners, or is it time to start bottom fishing the losers,” strategists led by Michael Wilson wrote in a note to clients on Monday. “While we continue to favor the large cap defensive tilt that has been working, we recommend creating a barbell with stocks that have already been hammered but offer good prospects at a reasonable valuation.” 

Following a year of blockbuster gains and earnings growth for U.S. stocks, most strategists now expect more muted returns in 2022. 

That’s because they see the post-pandemic economic rebound as past its peak, while the Federal Reserve hits the brakes on stimulus measures that fueled the rally. Beating benchmark indexes has also become more challenging as the rally narrows, with most of the gains concentrated in a handful of mega companies in the S&P 500. 

“We still recommend a large cap defensive bias given tightening financial conditions and decelerating growth,” Morgan Stanley’s strategists said on Monday, singling out real estate, healthcare and consumer staples as potential winners against the emerging macroeconomic backdrop. Opportunities also exist elsewhere, such as small and medium-cap value stocks, they said. 

“Despite the quality bias since March 2021, small cap value has outperformed small cap growth by 25 percentage points–the mirror image of large,” the strategists wrote. “That is some serious alpha, and we think it’s related to our other key view–valuation matters.”