According to Morgan Stanley, some struggling stocks might need to drop even further as investors look to cut their losses for tax benefits. This year, stocks have surged, largely thanks to interest in tech firms and artificial intelligence, but many investors missed out on the gains. As the year nears its end, there’s a lot of talk about which stocks might face selling pressure as individuals aim to recover tax losses. “Heading into the fourth quarter, a common discussion is about which stocks might be under pressure,” noted Michelle Weaver, an equity strategist at Morgan Stanley.
When investors sell a stock at a loss, they can offset capital gains with that loss, a process sometimes called loss recovery, which can help lessen tax liabilities. If the loss goes beyond the capital gain, up to $3,000 of the loss can offset ordinary income on federal tax returns. The leftover can be carried forward to future years. However, there’s a catch: investors can’t sell and then repurchase the same stock within 30 days—this is known as the “wash sale rule.”
To identify stocks that might be sold for these reasons, Morgan Stanley first focused on stocks that were popular among investors early this year. They filtered this list to find those with a significant absolute price-to-earnings ratio that could yield a notable tax loss. Initially, Weaver examined S&P 1500 stocks that were in the top fifth for average analyst ratings as of January 15, providing a starting point for capital deployment. Stocks decreasing by at least 10% from mid-January until the end of the third quarter were then considered, while those that fell more than 25% during that same timeframe were excluded, as larger declines often bounce back in the fourth quarter.
On the list are names like Wyndham Hotels & Resorts, which has dipped over 21% this year. In July, they reported a 2.3% decline in U.S. revenue per available room (RevPar) due to weak demand, with their third-quarter results set to be released on October 22. Halliburton’s stock has fallen by 12% since the start of the year. The oilfield services company forecasted a substantial decrease in full-year revenue when it announced its second-quarter results. CEO Jeff Miller commented that this suggested a softer oilfield services market in the short to medium term, emphasizing their intention to address this weakness while focusing on shareholder returns. Halliburton’s third-quarter financial results are expected on October 21.
Similarly, although Adobe’s stock rose in mid-September following better-than-expected third-quarter results, it remains nearly 21% down for the year. Morgan Stanley downgraded Adobe’s rating from overweight to equal weight in late September due to a slowdown in the company’s annual digital media recurring revenue. Analyst Keith Weiss remarked that the direct monetization of ‘Gen AI’ has not met initial expectations, largely because Adobe tends to prioritise broad adoption before monetizing such technology. Additionally, he expressed uncertainty regarding a significant part of Adobe’s recurring revenue base and questioned whether the progress in Gen AI would ultimately provide a net benefit.
