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Why Stocks Can Be Resilient Despite Geopolitical Risk

Why Stocks Can Be Resilient Despite Geopolitical Risk

Thoughts on the Market vor 1 Jahr

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Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why
investors have largely remained calm amid recent developments in
the Middle East.

Read more insights from Morgan Stanley.

----- 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 how to think about the tensions in the
Middle East for U.S. equities.

It's Monday, June 23rd at 11:30am in New York.

So, let’s get after it.

Over the weekend, the United States executed a surprise attack on
Iran’s nuclear enrichment facilities. While the extent of the
damage has yet to be confirmed, President Trump has indicated
Iran’s nuclear weapon development efforts have been
diminished substantially, if not fully. If true, then
this could be viewed as a peak rate of change for this
risk. In many ways this fits our overall narrative for U.S.
equities that we have likely passed the worst for many risks that
were weighing on stocks in the first quarter of the year. Things
like immigration enforcement, fiscal spending cuts, tariffs and
AI CapEx deceleration all contributed to dragging
down earnings forecasts.

Fast forward to today and all of these items have peaked in terms
of their negative impact, and earnings forecasts have rebounded
since Mid-April. In fact, the rebound in earnings revision
breadth is one of the sharpest on record and provides a
fundamental reason for why U.S. stocks have been so strong since
bottoming the week of April 7th. Add in the events of this past
weekend and it makes sense why equities are not selling off this
morning as many might have expected.

For further context, we looked at 23 major geopolitical events
since 1950 and the impact on stock prices. What we found may
surprise listeners, but it is a well understood fact by seasoned
investors. Geopolitical shocks are typically followed by higher,
not lower equity prices, especially over 6 to12 months. Only five
of the 23 outcomes were negative. And importantly, all the
negative outcomes were accompanied by oil prices that were
at least 75 percent higher on a year-over-year basis. As of this
morning, oil prices are down 10 percent year-over-year and this
is after the actions over the weekend. In other words, the
conditions are not in place for lower equity prices on a 6 to12
month horizon.

Having said that, we continue to recommend large cap higher
quality equities rather than small cap lower quality names. This
is mostly a function of sticky long term interest rates and the
fact that we remain in a late cycle environment in which the Fed
is on hold. Should that change and the Fed begin to signal rate
cuts, we would pivot to a more cyclical areas of
the market.

Our favorite sectors remain Industrials which are geared to
higher capital spending for power and infrastructure, Financials
which will benefit from deregulation this fall and software
stocks that remain immune from tariffs and levered to the next
area of spending for AI diffusion across the economy. We also
like Energy over consumer discretionary as a hedge against the
risk of higher oil prices in the near term.

Thanks for tuning in; I hope you found today's episode
informative and useful. Let us know what you think by
leaving us a review; and if you find Thoughts on the Market
worthwhile, tell a friend or colleague to try it out!