Stocks are unlikely to repeat last year's record-shattering performance in 2021 as a V-shaped recovery is largely priced in, Morgan Stanley says

• While the economy is "very likely" to have a good year in 2021, stock prices may not repeat their record-shattering performance of 2020 as a V-shaped recovery has already been priced into the market, said Morgan Stanley's Mike Wilson.
• The chief investment officer explained that the stock market is a discounting machine that looks forward, and it already priced in optimism around the economic recovery last year.
• Against this backdrop, "unprofitable growth stocks with big valuations" may underperform in 2021, while assets that will benefit from accelerating economic growth like small-cap stocks, financials, and materials will benefit.
• Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

2021 is "very likely" to be a good year for the economy and earnings growth, but the stock market may not soar like it did last year, according to Morgan Stanley's Mike Wilson.

That's because the stock market is a discounting machine that looks forward, and it already priced in optimism around the economic recovery in 2020, when the S&P 500 rocketed off of its March lows and closed the year with a 16% annual gain, Wilson explained on an episode of the Thoughts on the Market podcast.

"We have more confidence in our V-shape recovery that we've been forecasting, even as a second wave of the pandemic runs its course," said the chief investment officer and chief US equity strategist.

But when the economic data improves throughout 2021, it will have already been priced into the stock market.

"Therefore, 2021 is likely to be better economically, but asset markets are unlikely to repeat their performance of the past nine months," said Wilson.

Read more: Cathie Wood's ARK Invest runs 5 active ETFs that more than doubled in 2020. She and her analysts share their 2021 outlooks on the economy, bitcoin, and Tesla.

Against this backdrop, Wilson favors assets that will benefit the most from accelerating economic growth, higher interest rates, and inflation. These are mostly stocks that have underperformed over the past decade and are cheaper than broader indices, including small-cap stocks, financials, materials, consumer discretionary stocks, and "select" energy stocks, said Wilson.

Meanwhile, he forecasts "unprofitable growth stocks with big valuations" and high dividend yield stocks are vulnerable to rising interest rates and could underperform or potentially go down in 2021.

"We suggest being patient in here with new purchases, as the data catches up with what markets may have already discounted," the investment chief said.

Read more: 'Vastly technically disconnected': A market strategist breaks down the 3 indicators that show Tesla is overpriced - and says it's due for a 17% correction in the next 6 weeks