Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why
U.S. stocks took a hit that is likely to sustain through the
first half of 2025.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan
Stanley’s CIO and Chief U.S. Equity Strategist. Today on the
podcast I’ll be discussing tariffs, recent developments in
AI and what it means for stocks.
It's Monday, Feb 3rd at 11:30am in New York.
So, let’s get after it.
While 2024 was a strong year for many stocks, it was mostly a
second half story. With recession fears peaking last summer and a
Fed that remained on hold due to still elevated inflation,
markets were essentially flat year-to-date in early
August.
But then everything changed. The Fed surprised markets with
a 50 basis points cut to show its commitment to keeping
the economy out of recession. This was followed by better labor
data and two more 25 basis points cuts from the Fed.
Investors took this as a green light to add more equity
to portfolios—the riskier the better.
It also became clear to markets and many observers that President
Trump was likely going to win the election, with a rising chance
of a Republican sweep in Congress. Given the
more pro-growth agenda proposed by candidate Trump and
his track record during his first term as
President, he made investors even more bullish.
Finally, given all the concern about a hung election, the fact
that we got such definitive results on election night only added
fuel to the equation. Hedges were swiftly removed and even
reversed to long positions as both asset managers and retail
investors chased performance for fear of falling behind, or
missing out.
In October, I suggested the S&P 500 would likely trade to
6100 on a clean election outcome. After promptly hitting
that level in early December, stocks had a very weak month to
finish the year with deteriorating breadth. The S&P 500
started the year soft before rallying sharply into
inauguration day, essentially re-testing that 6100 level
once again. The difference this time is
that the re-test occurred on much lower breadth with
high quality resuming its leadership role. Tariffs were always on
the agenda, as was immigration enforcement, both of which
are growth negative in the short-term.
In my view, investors simply got complacent about these risks and
are now dealing with them in real time. This also fits with our
view that the first half of the year was likely to be tougher for
stocks as equity negative policies would be implemented
immediately before the equity positive policies like
de-regulation, tax extensions and reduced government spending had
time to play out in the form of less crowding out and lower
interest rates.
At the Index level, I expect the S&P 500 to trade in a range
between 5500 to 6100 for the next 3 to 6 months, with
our fourth quarter price target at 6500 remaining
intact. Since we have been expecting tariffs to be implemented,
this realization only furthers our preference
for consumer services over goods. It also supports our
preference for financials and other domestically geared
businesses that have limited currency or trade exposures.
In addition to rising political uncertainty, we also saw the
release of DeepSeek’s latest AI chat bot last week. This added
another level of uncertainty for investors that could have
lasting implications at both the stock and index level given the
importance of this investment theme. On one hand it could
also accelerate the adoption of AI technologies if it
truly lowers the cost – but many portfolios will need
to adjust for this shift if that’s the case. We think
it further supports our ongoing preference for software and media
over semiconductors.
Thanks for listening. If you enjoy the podcast, leave us a review
wherever you listen, and share Thoughts on the Market with a
friend or colleague today.
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