• A rising star at Morgan Stanley has landed a big promotion, according to a note reviewed by Business Insider. 
• Ted Pick will now oversee 9,000 staff and report directly to president Colm Kelleher. 
• At the same time, Franck Petitgas, a veteran investment banker at the bank, is set to head the firm's international business.

A rising star at Morgan Stanley just nabbed a big promotion at the New York investment bank, according to a memo reviewed by Business Insider. 

Ted Pick, who led the firm's institutional equities business, is set to oversee the Institutional Securities Group, a business with 9,000 workers spanning sales and trading, investment banking, capital markets, and research. He joined the bank after graduating college in 1990, and has quickly risen through the ranks. 

Notably, Pick helped revive the firm's fixed-income business, according to the memo penned by chief executive James Gorman and Colm Kelleher, the president of the bank. The move could also reflect that the bank is priming Pick to take over for Gorman. 

"Ted began his Morgan Stanley career in Investment Banking, worked for a decade in Global Capital Markets, eventually leading that business, went on to lead our Institutional Equities business to the number one position globally, and most recently has helped turn around our Fixed Income business. Leading ISG is a natural next step," the memo said. 

Morgan Stanley downsized fixed-income in 2015 as a result of poor performance. Pick said in 2016 that the decision was largely the result of the fixed income wallet, or total revenue pool, shrinking by around 40%. Revenues for the business in the fourth quarter of 2015 came in at just $550 million.

But the pool has been expanding a bit since then. Morgan Stanley's market share for fixed-income trading stands at around 8% to 10%, according to Gorman. 

Morgan Stanley's fixed-income revenue of $1.9 billion for the first quarter this year was only slightly behind rival Goldman Sachs, which posted $2.1 billion of revenue for the business.

The bank is also promoting Franck Petitgas, a veteran investment banker at the firm, to head the firm's international business. Both Pick and Petitgas will report to Kelleher. 

Elsewhere, Susie Huang has been promoted to become cohead of investment banking, the memo said. 

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• Morgan Stanley analysts think Wall Street is still underestimating how much Facebook can grow.
• In a research note, analysts at the investment bank set the stock a new price target of $215.
• It's an abrupt turnaround from just a few months ago, when Facebook's share price was getting pummeled in the aftermath of the Cambridge Analytica scandal. And it may be largely due to Instagram.

Facebook's reputation has been battered by the Cambridge Analytica scandal, but Facebook's business is humming. One big reason: Instagram. 

The photo-sharing app is turning into an increasingly important money-maker for Facebook.

According to the estimates of  Morgan Stanley analyst Brian Nowak, Instagram will account for 36% of Facebook total ad revenue growth in the second quarter. In a research note published on Tuesday, Nowak reckons that ads on Instagram will bring in $3.8 billion in revenue in Q2, and as much as $4.5 billion in Q4. 

That's especially important as Facebook's flagship social media service continues to experience a slowdown in the growth of its "ad load"— the number of ads that Facebook inserts into the newsfeed. 

The ad load slowdown within Facebook is very deliberate; the company is wary of turning consumers off by barraging them with too many ads. Luckily, Facebook has Instagram and its relatively un-monetized fields of content to pick up the slack. 

And whatever reputational damage Facebook's brand may be suffering, Instagram is more popular than ever with consumers.  The service recently crossed the 1 billion user milestone, and Morgan Stanley notes that the app's active user growth "inflected" in Q2, as Instagram added 750,000 users per day. 

The upshot: The investment bank is pegging its price target for Facebook's stock, which is currently floating around $203, at $215 — and suggests in a best-case scenario it could go as high as $245.

"We believe the Street is still underestimating FB's ability to grow even as ad load slows," Nowak writes. 

Facebook doesn't (yet) break out financial results for Instagram, so it's tough to know precisely how big of a contributor it is. But we'll get a sense about how it's doing by assessing the results of Facebook's overall business when it reports its Q2 earnings on July 25. 

SEE ALSO: The App Store has made Apple at least $40 billion in revenue since it was created 10 years ago today

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• Since June, investors have shifted toward more-defensive sectors like utilities, Morgan Stanley's equity strategists observed.
• They've been writing to clients this year about a drawn-out bear market in equity valuations and how to prepare.
• On Monday, they said it's time to get more defensive and downgraded the tech sector to underweight, with a list of reasons the sector may not be as rewarding to investors in the near term.

The stock market is at a turning point, according to Morgan Stanley.

For many months, the bank's equity strategists have written to clients about a forthcoming rotation toward defensive sectors, which investors prefer during downturns. They warned about a long, drawn-out bear market in valuations marked by slower profit growth. They recommended utilities as the best defensive sector as the broader stock market risked losses.

In a note Monday, the firm's chief US equity strategist, Mike Wilson, said the market's turning point arrived in June. Since June 18, defensive sectors like utilities and real estate have outperformed cyclical sectors like tech and financials.

Wilson also identified that two out of three conditions for a rotation to defensive sectors were happening and that investors were discounting them: peaking S&P 500 earnings growth on a year-on-year basis and a top in the 10-year Treasury yield. The third would occur if the 10-year yield were to fall below the two-year — a so-called yield-curve inversion.

They took their defensive call into a higher gear by downgrading small-caps to equal weight, and tech stocks to underweight, in a client note on Monday. They also upgraded consumer staples and telecom stocks to equal weight.

"We think it makes sense to lower broad [tech] exposure in the near term, or, at the very least, hedge sector exposure aggressively into earnings season as elevated valuations, lack of material earnings upside, extended positioning, technicals, and trade related risks all add up to a poor risk reward for the sector in the near term," Wilson said in a note on Monday.

Analysts project 25% earnings growth for tech companies, which will report second-quarter results shortly. Wilson, however, said there's not much room to meaningfully beat expectations.

This "remarkable" earnings forecast is already reflected in stock prices, Wilson said. Similarly, the fundamentals that would drive the earnings growth are already priced in. While not in "bubble" territory, he added, the price-to-earnings ratio for S&P 500 tech companies is over two standard deviations above the postcrisis average.

Tech companies, particularly hardware providers that source parts from all over the world, have benefitted from global trade but are in the crosshairs of a trade war. Wilson expects managements to address trade during earnings calls, which could dampen their guidance and earnings growth.

On a technical note, Wilson observed that fewer stocks were trading below their 200-day moving averages.

"Given its exceptional growth and quality characteristics, tech has been a holdout to date," Wilson said.

"However, we suspect it will not be immune from the changing attitudes toward risk assets we are seeing across markets and think the sector may have benefitted from a false sense of security the past few months."

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• A Morgan Stanley broker who ran Los Angeles-area branches is out amid numerous sexual-harassment claims at branches he managed, The Wall Street Journal reported Wednesday.
• The broker, Robert Perry, is not accused of sexual harassment, according to the report.

A broker leading some of Morgan Stanley's most profitable branches has left the firm amid allegations of sexual harassment at branches he ran, according to The Wall Street Journal.

Robert Perry, who left the investment bank this week after an investigation into his behavior and management style, managed money for high-net-worth Los Angeles-area clients like Elon Musk and Katy Perry, according to the report.

A Morgan Stanley spokeswoman confirmed Perry's departure from the firm.

Perry could not be immediately reached for comment.

Over the course of the past year and a half, numerous women have alleged sexual harassment or workplace hostility at the four branches run by Perry, The Journal reported, citing people familiar with the matter and court documents. The Journal said Perry had not been accused of any sexual harassment himself.

Read the full report here>>

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Budgets continue to grow for the IT department as chief information officers continue to prioritize investments in digital transformation and cloud computing, according to Morgan Stanley's Q2 2018 CIO survey, published Tuesday.

Researchers interviewed 100 CIOs — 77 in the US and 23 Europe — and found strong budgets across the board. While annual growth remains strong, CIO's were slightly less optimistic this quarter, and their expectations how much they will spend in 2018 were slightly lower than they had been in Q1. 

These are 9 of the key takeaways Morgan Stanley found from its survey. 

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US IT budgets are growing faster in 2018

...but CIOs were more optimistic about growth last quarter.

Software is king — and services are on the decline.

• Global mining companies invested almost $1 trillion in major projects between 2008-2017.
• Despite strong industry conditions, almost one-third of that — $273 billion — was written off.

Global mining companies have had a good run since the start of this century. But research from Morgan Stanley shows big miners weren’t averse to shooting themselves in the foot while the money was flowing in.

In a research note on the global mining outlook, MS analysts said annual post-tax returns on capital for BHP and Rio averaged 14% from 2000-2017, up from 8% between 1981-1999.

Returns climbed above 18% in the period between 2004-2012, when Australian miners were digging as many resources out of the ground as they could, to supply the rampant demand from China’s booming economy.

"Unfortunately, a substantial portion of the associated cash flows was squandered," Morgan Stanley said.

The following chart, based on research from Price Waterhouse Coopers, tells the story:It shows that in the period from 2008-2017, global mining companies invested around $939 billion in major projects.

Unfortunately, $273 billion was written off as impairments — equivalent to around 29% of the initial capital outlay.

As the chart shows, the extent of the writedowns was almost as high as the amount of dividends paid over the period.

Australia’s big miners played a role in that, with Rio booking huge losses on ill-fated aluminum and coal projects while BHP was forced into a multi-billion dollar write-down of its US shale oil assets.

Looking ahead, "the industry has made changes that suggest the capital destruction of the last 15 years should not repeat", Morgan Stanley said.

Dividend payout ratios are now typically held in a range between 40%-50%, with more cash returned to shareholders when profits rise which reduces the risk of overspending during buoyant market cycles.

In addition, companies now have more realistic growth assumptions, compared to the overly optimistic assessments in years past which were the catalyst for poor investment decisions.

And boards also have stricter remuneration policies, extending the timeline for share-based incentives and increasingly using return on capital as a core performance metric.

SEE ALSO: China is the world's biggest oil buyer — but its demand may be slowing down soon

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Morgan Stanley is set to announce second quarter earnings results Wednesday morning.

Here's what analysts are expecting and other themes to look out for. 

• Revenue: $10.08 billion
• Net income: $1.96 billion 
• Earnings per share: $1.11
• Return on equity: 10.1%
• Trading: Investors will be looking for insight into whether the bank witnessed further growth in its trading business, specifically fixed income, which posted stellar results in the first quarter. They're also watching to see if the bank can sustain its market share in equities, where it leads Wall Street. Other big banks, with the exception of Morgan Stanley rival Goldman Sachs, saw strong gains in their stock trading units in the second quarter.
• Succession: Morgan Stanley in July made several big promotions, which hinted at who might replace CEO James Gorman one day. With Goldman CEO Lloyd Blankfein announcing his retirement this week, investors will be listening closely for any clues about when Gorman might too step down.  
• Macro environment: Bank CEOs have said that Trump's tariff talk hasn't yet impacted client activity, although BlackRock CEO Larry Fink has said otherwise. Investors will be looking to Gorman for any additional color on how a potential trade war is hurting or helping the bank. 

SEE ALSO: A rising star at Morgan Stanley who helped turn around an ailing business has landed a big promotion

ALSO READ: A trading unit Morgan Stanley left for dead could be 'the most exciting business' if 2 things happen

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• Morgan Stanley's chief executive officer James Gorman thinks fixed income could be an exciting business for the bank if two things happen.
• It's a business that crushed it in the first three months of the year. But it's also one the bank left for dead in 2015. 

A trading unit at Morgan Stanley has made a big turnaround, and chief executive James Gorman now thinks there's a chance it could again become red hot.

Gorman, speaking at the  Morgan Stanley US Financials Conference in New York on Tuesday, said fixed-income trading could be the "most exciting business" if two things play out. 

Fixed income trading was a standout in the firm's first quarter earnings, posting its best results in the unit since 2015. 

Still, it's one the bank took an axe to in 2015, cutting 25% of its workforce, replacing its leadership, and slashing bonuses.

But things are looking up,  Gorman said. And the good times could keep rolling if market volatility hangs around and the central banks start to raise rates. Here's Gorman:

"Fixed income is the most exciting business if two things happen. One is some volatility creeps into the market that you see some QE and you see the Fed ... start raising rates. Eventually Europe will raise rates, eventually Japan will raise rates. See, you've got both the recovery and the credit part of the fixed income business and micro part and the recovery potential in the macro pod and that's sort of what we're seeing."

Ted Pick, Morgan Stanley's head of sales and trading, said in early 2016 that the decision to rightsize the business was largely the result of the fixed income wallet, or total revenue pool, shrinking by around 40%. Revenues for the business in the fourth quarter of 2015 came in at just $550 million.

Gorman said that pool has been expanding a bit since then. Morgan Stanley's market share for fixed income trading stands at around 8 to 10%, he added. 

Morgan Stanley's fixed income results of $1.9 billion for the first quarter this year were only slightly behind those of rival Goldman Sachs, which posted revenues of $2.1 billion for the business. 

As for Gorman, he's bullish that fixed income revenue could continue to surpass $1 billion per quarter. 

SEE ALSO: Morgan Stanley posted a big rebound in a business it once left for dead

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• Morgan Stanley is spending billions both to bolster its existing technology infrastructure and to invest in new technologies.  
• Specifically, the bank's tech spend is about $4 billion per year, CEO James Gorman said.  
• As a percentage of its overall expenses, Morgan Stanley could be devoting twice the amount to tech spend as Citi. 

Morgan Stanley is spending around $4 billion annually to invest in technology, CEO James Gorman said on Tuesday.

That's around 40% of the firm's $10.3 billion expense budget excluding compensation costs in 2017. Still, it's not clear if the figure Gorman mentioned includes compensation for tech employees. As a percentage of overall expenses, Morgan Stanley could be devoting twice the amount to tech spend as rival Citi.

"I think what you're seeing is the challenges, we're spending $4 billion roughly, finding the right share of that $4 billion on investments for the future versus maintaining the ship we've got today," Gorman said, speaking at the Morgan Stanley US Financials Conference in New York.

Bringing electronic trading to its fixed income unit is a "major priority" for the bank's tech investment, Gorman said. 

Morgan Stanley has been putting a greater focus on technology at the firm. Rob Rooney, who previously oversaw the bank's operations in Europe, the Middle East, and Africa, as well as its efforts in tech, was transitioned to New York to oversee technology exclusively.

The bank is also investing heavily in digital within its wealth-management business. It launched a robo adviser in late 2017, primarily geared at children of its existing clients.

Morgan Stanley held its annual CTO Innovation Summit in June, which helps it connect with vendors and startups on new nascent technology. 

Automation, machine learning and artificial intelligence were among some of the innovation priorities explored at this year's event. 

SEE ALSO: Citigroup's CEO has revealed just how many billions the bank is spending on tech — and it shows the speed with which Wall Street is changing

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• Environmental, social, and governance investing — also known as ESG — has exploded in popularity, with roughly $23 trillion being invested with at least a partial ESG mandate.
• Morgan Stanley sees several factors combining to make ESG an even bigger investment force than it already is.

Sustainable investing is here to stay, whether money managers like it or not. And if Morgan Stanley's prognostications are correct, it's about to start making its influence felt to an unprecedented degree.

The firm published a report on the state of environmental, social, and governance investing — or ESG, as it's more commonly called — and found it to be at a tipping point. The strategy is growing at a time when investor reservations are vanishing, creating an ideal situation for growth, according to Morgan Stanley.

Money managers already have almost $23 trillion earmarked with an ESG mandate, which is roughly 25% of the entire global investment universe. Roughly $8.7 trillion of that is US money, while European investors account for another $12 trillion, Morgan Stanley data show.

As the chart below shows, 84% of the 118 assets owners surveyed by the firm are at least "actively considering" integrating ESG criteria into their investment decisions, with nearly half saying they're seeking implementation across the board. For context, the group spans public and corporate pensions, endowments, foundations, sovereign wealth entities, insurance companies, and other large asset owners worldwide.

While the high percentage of desired adoption is a positive sign for ESG, the strategy must still contend with the perception that, by engaging in sustainable investing, traders are sacrificing potential returns in the name of a good cause. Morgan Stanley recently conducted a separate individual investor survey that found 57% of respondents believing ESG requires a "financial trade-off."

After all, as the chart below shows, proof of performance remains the top deciding factor for investors considering an ESG strategy.

Luckily for ESG enthusiasts, the firm says this misguided idea seems to be fading.

"It appears that large institutional asset owners may be replacing this view with a more sophisticated recognition that ESG factors provide unique insights into long-term risks and opportunities that might not be captured by traditional financial factors," Morgan Stanley analysts wrote in a report.

What's more, the firm finds that the future looks bright for ESG, considering the investment behaviors of millennials. Morgan Stanley's 2017 survey of individual investors found they're more than twice as likely as other generations to consume products made by companies seen as sustainable.

With all of that established, it's clear that ESG has a bright future of growth ahead of it, especially as the notion of a value trade-off evaporates.

"Fueled by a convergence of long-term performance considerations with trends like mission alignment, regulations and stakeholder demand, interest in sustainable investing has both accelerated and evolved," the firm said. "We expect many more opportunities to open up for those managers who are able to build the products, relationships and trust that can help investors generate strong risk-adjusted returns while having a positive impact on the world."

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• Oracle's shares sunk 7% on Wednesday following news that the company would no longer report metrics for cloud, a segment once seen as vital to the company's growth.
• Oracle characterizes its new reporting structure as a more accurate way to reflect how customers use its software licenses. The company says that customers are buying more traditional licenses, but using them in the cloud. 
• Investors, many of whom see cloud growth a vital to their understanding of the company, were skeptical of Oracle's move.

Oracletraded down over 7% on Wednesday, following a rebellion from investors after the company made the decision to stop reporting specific metrics for its cloud business. That cloud business was once believed to be the database giant's saving grace against its younger, fast-growing rivals at Amazon and Google. 

In a call with investors Tuesday, CEO Safra Catz characterized the newly consolidated reporting structure as a more accurate way to understand Oracle's complex business, in which companies frequently buy on-premise licenses, but then go on to use those licenses for cloud services. 

"Previously, all of those licenses and its related support revenue would have been counted entirely as on-premise, which clearly it isn’t," Catz said.

But even the most bullish of investors were unconvinced of the move. Some analysts have suggested that even if the move is justified, it "overshadows" an otherwise successful earnings report.

"As investors seek additional information to try to garner confidence on the ability and timing of the higher-growth parts of the business overcoming the drags of declining legacy businesses, Oracle management went the opposite direction by consolidating revenue segment breakdown into just four categories," wrote Morgan Stanley analyst Keith Weiss, who favorably rates Oracle as overweight. 

Barclays analyst Raimo Lenschow, who also rates Oracle as overweight, was more sympathetic to Oracle's decision, but wrote that it could take a toll on the stock price for weeks to come.

"We get management's dilemma here due to an increasingly blurred picture between what is cloud usage and what is on-premise usage," Lenschow wrote. "However, investors will likely need a few quarters to get comfortable here."

Sitting on the more skeptical end of the spectrum is Pat Walravens, an analyst with JMP Securities, who has a neutral rating on the stock. 

"The bear case on Oracle all along has been that they say the numbers the way they want to present them," Walravens told Business Insider. "When you look at the bottom line, there is really no growth."

Walravens highlighted Oracle's decelerating growth in the cloud, which fell from 51% year-over-year growth in Q1 2018 to just 21% in Q4 2018. 

But Walravens said that it's not just about cloud metrics. He sees the reporting change as part of a systemic issue with Oracle and he's interested in seeing a "pretty fundamental change" in how management approaches its business. 

"The way they think about their business is that it's about winning. Larry Ellison loves to win," Walravens said. "I think what you need to see them focus on is their customers winning. They really need to become more customer centric." 

Ultimately, though, even Walravens thinks there's no reason to panic, and that Oracle still has a lot going for it.

"It's super profitable, it generates a lot of free cash-flow and it's not very expensive," he said. 

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• Investor nerves have been rattled by the mounting prospect of an all-out global trade war as major US indexes tumble.
• Morgan Stanley has identified one area of the stock market it says will be a safe haven of sorts for traders worried about their equity exposure.

Fears of an all-out trade war have frazzled investor nerves, as indicated by the large drops across major US equity indexes.

But before investors exit the stock market entirely, Morgan Stanley wants them to know that there is a safe haven of sorts for equities, buried among the market wreckage.

The stocks in question are known as "small caps," or companies with meager market values, at least relative to benchmarks. Often overlooked when more actively traded mega-cap shares are soaring, Morgan Stanley argues their fundamental picture is compelling.

First off, since small cap corporations are usually more domestically focused than their larger peers, they're better positioned to benefit from the nationalistic tax cuts afforded by the GOP tax law. Those tax savings trickle down to a company's bottom line, improving the prospects for earnings growth.

Secondly, Morgan Stanley points out that small caps are also well-positioned to see a positive effect from business-friendly deregulation.

Largely piggybacking off the boost provided by these two dynamics, small caps have crushed the broader market so far this year. Their dominance can be seen in this chart, which shows that a pair of small cap indexes (represented by the two blue lines) has dominated the S&P 500.

But this conversation is null and void without a discussion of what the market's latest and most threatening flashpoint — the escalating global trade war — means for small caps.

Luckily for investors considering a small-cap investment, Morgan Stanley finds that they're less vulnerable to what it describes as "anti-trade rhetoric." This once again comes back to the comparatively small international exposure small caps have.

In the end, small caps feature a compelling trifecta of positive attributes, offering a viable option for investors who want to stay invested in stocks, but want to be less exposed to President Donald Trump's latest trade headlines.

So with all of that established, are small caps still a good bet, despite already destroying benchmarks for much of this year? Morgan Stanley says yes. And it all comes down to growth.

"While the relative outperformance of small caps we have seen is a lot, forward growth expectations indicate it is likely to continue," Mike Wilson, the firm's chief US equity strategist, wrote in a client note. "The growth differential between small and large caps may be widening even further from here which should extend the relative outperformance."

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• Google should give away its $49 Home Mini smart speaker free to every US household, Morgan Stanley argues.
• Such a giveaway would cost $3.3 billion but ensure that Google is in prime position for what could be the next major platform shift.
• Smart speakers are expected to be key to the rise of "voice commerce," and Amazon's foothold in consumer homes gives it a strong lead.

Morgan Stanley's financial analysts argue that for Google, there's no place like Home.

In four years, 70% of US households are predicted to own a smart speaker, which consumers are expected to increasingly turn to for shopping and entertainment. To ensure that a big share of those devices are Google's, the company should give free Google Home Minis to consumers in the United States and maybe even across the globe, the Morgan Stanley analyst Brian Nowak wrote in research note Thursday.

Smart speakers, like the Google Home and the Amazon Echo, are a hit with consumers and will continue to sell fast, Nowak said, adding that because these devices present so many important opportunities, Google needs to move fast and get its smart gadgets into homes faster than competitors.

If it doesn't, Amazon's Echo smart speaker stands to emerge as the dominant device, and that means a lot of bad things for Google, Morgan Stanley said.

For starters, there's the growing popularity of voice-shopping — the act of shouting to a smart speaker that there's no more laundry detergent or Fruit Loops and leaving it to the machine to place the order with a retailer. Morgan Stanley said that if consumers weren't shouting to a Google Home device, then that could "threaten the long-term growth" of Google's lucrative retail-search advertising business, which accounts for 20% of Google's US ad revenue.

In addition, the more homes Google's smart devices get into, the bigger the opportunity to develop the company's promising digital-valet category, such as Duplex, Morgan Stanley wrote.

The analysts also imagine a dual giveaway, pairing the Home Mini with a free YouTube Premium trial, which they argue could spur adoption of YouTube's new subscription music service.

"If 15% of free trial US households begin paying for YouTube Premium," the analysts wrote, "it would generate $1.8 billion of incremental annual YouTube revenue. This would potentially (increase YouTube revenue 6%) and pay back the total device cost in 4 years." The analysts added that this could add to YouTube's value, which the bank earlier this year estimated was $160 billion, more than GE, IBM, or Disney.

Google sells the Home Mini device for $49 (though it's often available for less with various promotions). Nowak reckons the cost of giving the devices away free to every US household would total $3.3 billion — that's a lot of money, but for a company as large as Google it's only 3% of 2019 expected operating expenses. That could prove to be money well spent, if it safeguards Google's valuable retail search business.

The bank laid out the reasons they might be wrong and those include the possibility consumers may prefer interacting with digital valets via their mobile phones, which could “offset demand” for the speakers. And because the analysts estimated that 50% of America’s homes are already Amazon Prime members, those consumers might be less likely to want a Google Home device.

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• Morgan Stanley has upgraded utilities to "overweight" as it forecasts that bond yields have peaked for now.
• The sector, a bond proxy, is considered a safe haven during market turmoil and becomes more attractive when bond yields fall because it pays out steady dividends.
• It's rallied in recent weeks even as the broader market sold off amid trade tensions.

One sector remained green as the stock market sold off on Monday: utilities.

The so-called bond proxy, preferred during times of turmoil for its steady dividends, gained 1.7% as the broader market fell on trade tensions.

The equity strategists at Morgan Stanley expect further weakness in the stock market and have said a lengthy bear market may already be underway.

"We think it is still too early to go full-on defensive, but it is not too early to start moving in that direction," Michael Wilson, Morgan Stanley's chief equity strategist, said in a recent note.

He said the firm was upgrading utilities to "overweight" "on the premise we are close enough to a top on 10-year Treasuries even if the final highs are not in."

"Morgan Stanley's Global Interest Rate strategy team thinks 10-year Treasury yields have topped for the cycle at its recent high of 3.12%," he said.

Because it's considered a bond proxy, the sector's dividends would look more attractive to investors if Treasury yields fall, as Morgan Stanley forecasts.

Wilson added that the earnings-revision breadth for utilities, which gauges the number of companies revising future profits higher compared with those downgrading, moved higher over the past month. "Performance should begin to follow if even rates have not yet peaked," Wilson said.

The list below highlights the utilities stocks that are rated "overweight" by the analyst Stephen Byrd. His price targets were published last Monday, and most of the stocks have rallied since then.

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American Electric Power

Ticker:AEP

Market cap: $33.8 billion

Morgan Stanley's price target: $67

% to Morgan Stanley's price target: -0.5%

Source: Morgan Stanley

FirstEnergy

Ticker:FE

Market cap: $17.24 billion

Morgan Stanley's price target: $36

% to Morgan Stanley's price target: 2.2%

Source: Morgan Stanley

NextEra Energy

Ticker:NEE

Market cap: $79.01 billion

Morgan Stanley's price target: $169

% to Morgan Stanley's price target: 2.4%

Source: Morgan Stanley

• Cybersecurity firms that address data governance concerns will be the big winners in 2018, as chief security officers figure out how to better comply with regulations like the European Union's GDPR, according to a survey published by Morgan Stanley.
• In response to its survey, Morgan Stanley raised its price target on three cybersecurity companies: Varonis, SailPoint, and CyberArk, which all address specific governance issues on the minds of executives.
• But Morgan Stanley lowered its target for Symantec, a longstanding leader in cybersecurity, in response to declining interest from companies in its end-point security product.

Morgan Stanley raised its price target on three security firms after a survey of IT executives indicated that data regulations like GDPR will drive big cybersecurity spending in 2018 and beyond.

In the 2018 State of Security Spending report, published Monday, analyst Melissa Franchi wrote that Varonis, SailPoint, and CyberArk will be the big winners as chief security officers (CSOs) scramble to ensure that their companies are compliant with data governance laws.

GDPR, the strict data regulations which went into affect in the European Union on May 25, impacts any and all companies which deal with the data of people residing in the EU. Of the CSOs surveyed, GDPR was the number one driver for increased security spend in 2018, up from being the number five driver in the 2017 survey. 

Morgan Stanley raised its price target for Varonis, a data governance company, from $63 to $73 following its survey. Franchi described the company as "one of the key beneficiaries of GDPR regulation given its well positioned data governance and insider threat solutions."

Interestingly, Morgan Stanley's target is down from the $77.85 that the stock opened at on early Monday. By close, shares were down nearly 7% to $73 flat. 

It raised its target for SailPoint, an identity governance company, from $24 to $26. While only 9% of execs listed identity management as a top concern, Franchi said, this is up from the 2017 survey, and many companies will likely look to identity management to meet GDPR.  

It also raised its target for CyberArk from $56 to $65. The self-described privilege access management (PAM) company will benefit from GDPR "as enterprises look to lock down privileged accounts that have access to systems/applications exposed to personal data," Franchi wrote.

Morgan Stanley also raised its bull case for the company ForeScout from $52 to $62 in response to executive interest in Network Access Control, though it kept its base case relatively "conservative." Its base price target remains $34. 

The major exception to Morgan Stanley's price-raising spree was Symantec, a once-ubiquitous cybersecurity software provider which the survey indicated will lose considerable share when it comes to endpoint security and web security gateways in the next three years. "This raises some additional concern on the ability of Symantec to see improving enterprise security revenue growth," Franchi wrote.

Symantec currently has 8% of today's endpoint security spend, but Morgan Stanley expects this to drop to 5% in the next 36 months. For that reason, the firm dropped its target price for Symantec from $26 to $23. 

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• $15 billion for a startup that makes e-cigarettes would have been laughable several years ago.
• That was before Juul Labs, the San Francisco-based company behind America's most popular vape pen, put its device on the market.
• In a recent memo, Morgan Stanley analysts credited the Juul with "driving a revival in the US e-cig market," adding that sales of the Juul "accounted for almost the entire incremental increase in US e-cig sales."

$15 billion for a startup that makes e-cigarettes would have been laughable several years ago. That was before Juul Labs, the San Francisco-based company behind America's most popular vape pen, put its device on the market.

The lofty valuation came last week as part of an announcement that Juul was raising $1.2 billion for an overseas expansion.

Users — some of them former smokers — swear by the devices, known as Juuls, because they pack a powerful nicotine punch.

Teens love them too. It's a trend that terrifies public health experts who say teens are attracted to the Juul's fruity flavors and discrete appearance. Not surprisingly, the Juul has rocketed into first place as the most popular vape pen in the US, having generated a whopping $224 million in retail sales between November 2016 and November 2017 and snagging a third of the total e-cig market share.

Beyond driving sales, however, the Juul may be singlehandedly resurrecting the e-cigarette market, which had been slumping since roughly 2014 as the devices failed to satisfy smokers.

In a recent research note, Morgan Stanley analysts credited the Juul with "driving a revival in the US e-cig market," adding that sales of the Juul "accounted for almost the entire incremental increase in US e-cig sales as a percent of total cigarette and e-cigarette sales in the last year."

'A growing headwind to US cigarette volumes'

The Juul is doing so well that it is even starting to encroach on Big Tobacco's terrain, the note said.

"We believe JUUL has become a growing headwind to US cigarette volumes," the analysts wrote.

That's a concern echoed by Citigroup analysts back in April, when they warned investors in traditional tobacco stocks like Philip Morris and Altria to be mindful of the extent to which the Juul would disrupt their traditionally strong performance.

"The US tobacco market is beginning to be disrupted by Juul," the Citigroup analysts wrote, adding, "We don't expect underlying cigarette trends to improve much in the rest of 2018."

A positive outlook for Juul despite growing safety concerns

Despite analysts' enthusiasm for Juul, the startup is facing several challenges on the public health front.

That includes emerging research questioning the health and safety of vaping and the uniquely addictive potential of the Juul, which packs twice the nicotine of comparable devices. Other issues include a Food and Drug Administration query into whether the company marketed its products to teens, as well as increasing demands from Congress members for the FDA to review the Juul's safety. Local initiatives like San Francisco's recent ban on flavored tobacco could put additional pressure on Juul, which has advertised sweet and fruity flavors as a key part of its appeal.

But analysts aren't too worried about Juul's future — at least not for the next five years.

That's largely because of a current FDA rule that exempts any e-cig sold since August 2016 from the agency's review until 2022. That means Juul should remain largely untouched by federal regulation for at least the next several years, the analysts wrote. Even then, once Juul sends in an application to the agency, they likely wouldn't respond until "sometime in 2023 at the earliest," they said.

"We believe the FDA's near-term options for constraining JUUL growth are limited," the analysts wrote.

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• Wall Street rejoiced this week on news that Dell would not pursue a "reverse merger" with VMware.
• In the words of Morgan Stanley, "Independence Day Comes Early" for VMware, since the potential reverse merger with Dell weighed heavily on its stock price.
• The reverse merger would have taken Dell public but decimated VMware's shareholder value, according to analysts.
• VMware is up 9% on sustained excitement following an official announcement from Dell on Monday that it would return to the public markets through the purchase of a VMware tracking stock, DVMT.

VMware investors are rallying.

Shares for VMware, a cloud computing and virtualization company, are up 9% from the closing price Friday on news that its privately owned parent company Dell wouldn't pursue a so-called reverse merger, which would have taken Dell public but could've decimated VMware's value for shareholders.

Morgan Stanley, one of Wall Street's toughest critics of the deal, raised its outlook on VMware on Tuesday in a note titled "Independence Day Comes Early."

"With the bear case threat of a reverse merger with Dell effectively shelved, investor focus turns to fundamentals — and recent fundamentals have been strong," the Morgan Stanley analyst Keith Weiss wrote.

Morgan Stanley raised its price target for VMware to $175 from $150, citing high billings growth in the first quarter and sustained earnings.

Dell, which owns 81% of VMware, plans to take itself public through the buyout of a VMware tracking stock, DVMT.

As part of the deal, VMware's board of directors announced an $11 billion special dividend to its shareholders, worth about $27 a share. Dell plans to use the cash it gets from the dividend to finance the tracking stock deal.

While VMware's 2019 revenue won't be affected, the company did lower its guidance on earnings.

The company expects to see $5.99 in adjusted earnings for the 2019 fiscal year, down from the $6.14 anticipated before the dividend was announced.

The company also lowered its guidance on free cash flow to $3.32 billion, down $50 million from its earlier guidance of $3.27 billion for the 2019 fiscal year.

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• A rising star at Morgan Stanley has landed a big promotion, according to a note reviewed by Business Insider. 
• Ted Pick will now oversee 9,000 staff and report directly to president Colm Kelleher. 
• At the same time, Franck Petitgas, a veteran investment banker at the bank, is set to head the firm's international business.

A rising star at Morgan Stanley just nabbed a big promotion at the New York investment bank, according to a memo reviewed by Business Insider. 

Ted Pick, who led the firm's institutional equities business, is set to oversee the Institutional Securities Group, a business with 9,000 workers spanning sales and trading, investment banking, capital markets, and research. He joined the bank after graduating college in 1990, and has quickly risen through the ranks. 

Notably, Pick helped revive the firm's fixed-income business, according to the memo penned by chief executive James Gorman and Colm Kelleher, the president of the bank. The move could also reflect that the bank is priming Pick to take over for Gorman. 

"Ted began his Morgan Stanley career in Investment Banking, worked for a decade in Global Capital Markets, eventually leading that business, went on to lead our Institutional Equities business to the number one position globally, and most recently has helped turn around our Fixed Income business. Leading ISG is a natural next step," the memo said. 

Morgan Stanley downsized fixed-income in 2015 as a result of poor performance. Pick said in 2016 that the decision was largely the result of the fixed income wallet, or total revenue pool, shrinking by around 40%. Revenues for the business in the fourth quarter of 2015 came in at just $550 million.

But the pool has been expanding a bit since then. Morgan Stanley's market share for fixed-income trading stands at around 8% to 10%, according to Gorman. 

Morgan Stanley's fixed-income revenue of $1.9 billion for the first quarter this year was only slightly behind rival Goldman Sachs, which posted $2.1 billion of revenue for the business.

The bank is also promoting Franck Petitgas, a veteran investment banker at the firm, to head the firm's international business. Both Pick and Petitgas will report to Kelleher. 

Elsewhere, Susie Huang has been promoted to become cohead of investment banking, the memo said. 

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• Morgan Stanley analysts think Wall Street is still underestimating how much Facebook can grow.
• In a research note, analysts at the investment bank set the stock a new price target of $215.
• It's an abrupt turnaround from just a few months ago, when Facebook's share price was getting pummeled in the aftermath of the Cambridge Analytica scandal. And it may be largely due to Instagram.

Facebook's reputation has been battered by the Cambridge Analytica scandal, but Facebook's business is humming. One big reason: Instagram. 

The photo-sharing app is turning into an increasingly important money-maker for Facebook.

According to the estimates of  Morgan Stanley analyst Brian Nowak, Instagram will account for 36% of Facebook total ad revenue growth in the second quarter. In a research note published on Tuesday, Nowak reckons that ads on Instagram will bring in $3.8 billion in revenue in Q2, and as much as $4.5 billion in Q4. 

That's especially important as Facebook's flagship social media service continues to experience a slowdown in the growth of its "ad load" — the number of ads that Facebook inserts into the newsfeed. 

The ad load slowdown within Facebook is very deliberate; the company is wary of turning consumers off by barraging them with too many ads. Luckily, Facebook has Instagram and its relatively un-monetized fields of content to pick up the slack. 

And whatever reputational damage Facebook's brand may be suffering, Instagram is more popular than ever with consumers.  The service recently crossed the 1 billion user milestone, and Morgan Stanley notes that the app's active user growth "inflected" in Q2, as Instagram added 750,000 users per day. 

The upshot: The investment bank is pegging its price target for Facebook's stock, which is currently floating around $203, at $215 — and suggests in a best-case scenario it could go as high as $245.

"We believe the Street is still underestimating FB's ability to grow even as ad load slows," Nowak writes. 

Facebook doesn't (yet) break out financial results for Instagram, so it's tough to know precisely how big of a contributor it is. But we'll get a sense about how it's doing by assessing the results of Facebook's overall business when it reports its Q2 earnings on July 25. 

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• A Morgan Stanley broker who ran Los Angeles-area branches is out amid numerous sexual-harassment claims at branches he managed, The Wall Street Journal reported Wednesday.
• The broker, Robert Perry, is not accused of sexual harassment, according to the report.

A broker leading some of Morgan Stanley's most profitable branches has left the firm amid allegations of sexual harassment at branches he ran, according to The Wall Street Journal.

Robert Perry, who left the investment bank this week after an investigation into his behavior and management style, managed money for high-net-worth Los Angeles-area clients like Elon Musk and Katy Perry, according to the report.

A Morgan Stanley spokeswoman confirmed Perry's departure from the firm.

Perry could not be immediately reached for comment.

Over the course of the past year and a half, numerous women have alleged sexual harassment or workplace hostility at the four branches run by Perry, The Journal reported, citing people familiar with the matter and court documents. The Journal said Perry had not been accused of any sexual harassment himself.

Read the full report here>>

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