In a market riddled with fear and uncertainty, it is understandable that SOSs are flashing all over Wall Street. They’re especially conspicuous from brokerage research departments, whose latest alerts are rife with warnings to jittery investors about the next potential shoes to drop.

Such action raises a critical question: With one sector after another getting smashed in the latest bear market — chief among them financial companies, real estate-related firms, automakers, retailers, and airlines — which of the industries vulnerable to a weakening economy will be the next to falter and feel the selling wrath of investors?

Morgan Stanley’s chief American investment strategist, Abhijit Chakrabortti, casts his ballot for industrial or cyclical stocks, which embrace such significant market sectors as aerospace and defense, machinery, capital goods, mining, transportation, and construction.

A principal of Los Angeles-based P&W Partners, money manager Tom Postin, echoes Mr. Chakrabortti’s thinking, noting: “We’ve been cutting back on industrials both here and abroad. With global growth slowing, you’re talking about serious potholes for economically sensitive stocks and this is the wrong time and place for economically sensitive stocks.” Viewing industrials as an increasingly vulnerable area and a sector that he believes merits reduced portfolio exposure, Mr. Postin says he has been shorting some of these stocks (a bet they will fall in price).

Standard & Poor’s also takes a dim view of the industrials. With the American economic slowdown accelerating and mid-cycle slowdowns under way in Europe, Britain, Canada, and Japan, “we believe this cyclical sector is vulnerable to a contraction in its price/earnings multiples,” S&P’s chief investment strategist, Sam Stovall, says.

In a commentary recently issued to Morgan Stanley’s clients, Mr. Chakrabortti observed that he was most negative on industrial companies exposed to global construction and mining, domestic residential and commercial construction, residential-related expenditures, and commercial aerospace.

In this context, he pinpointed such high-profile industrials as Caterpillar, Honeywell, and Ingersoll-Rand. Also included on his hit list are Cooper Industries, Terex Corp., Mueller Water Products, Wesco International, and Watsco.

“We expect to see portfolio rotation out of the crowded global cyclicals,” he warns. It’s a trend, he says, that’s in its early stages and will continue to gain momentum as the focus shifts back to the risks in global market growth, particularly in emerging markets.

Industrials are described by Mr. Chakrabortti as operating leverage plays that should be bought when capacity utilization rates are low and rising, and sold when they have peaked and are falling, as they are now. Capacity utilization rates peaked at 81.4% in July 2007, and in the past few quarters readings have run below 80%. Mr. Chakrabortti sees further deterioration on this front, with the capacity utilization rates bottoming at 77% in the first quarter of 2009.

In addition to capacity utilization worries, the strategist points to such other risks for industrials as optimistic earnings expectations, unattractive valuations based on earnings trends, rising growth risks overseas, and growing risk of project cancellations, which are already running about three times the historical average rate.

He points out that the risk of earnings disappointments — focused earlier this year on the financial and consumer sectors, whose numbers have been cut 41% and 21%, respectively — is rapidly shifting to industrials, whose estimates have been barely reduced (a mere 4%). This is the case, he notes, despite rising margin pressures from high prices, loss of operating leverage as utilization drops, and deterioration in a number of growth indicators.

Morgan Stanley’s team of industrial analysts figures Wall Street’s estimated earnings growth for the industrial universe could be as much as 10% too high for the second half of 2008, particularly as tough second-half 2007 profit comparisons begin to kick in, as well as for all of 2009.

Mr. Chakrabortti further cautions that on a valuation basis, the industrials have little support because they’re already trading at a 5% premium to the market based on estimated 2009 earnings, which are more than 30% above their long-term trend. Any revision in earnings would likely cause these stocks and their profit expectations to fall, he warns, and the sector’s valuation could easily swing to a 10% discount from a 5% premium.

Morgan Stanley is not down on all industrials. It notes that it is least worried about companies whose earnings are not stretched relative to trend and where earnings volatility is likely to be low. Noteworthy in this respect are General Dynamics and Danaher Corp.

The bottom line: The Boy Scout motto is, “Be prepared.” According to Morgan Stanley, investors should follow suit when it comes to industrial stocks.

dandordan@aol.com