Global trade tensions have eased after a steadying in U.S. policy
shifts, leading our CIO and Chief U.S. Equity Strategist Mike
Wilson to make a more bullish case for the second half of 2025.
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 will discuss recent developments on tariffs and
interest rates, and how it affects our 12 month view for U.S.
Equities.
It's Friday, May 23rd at 9am in New York.
So, let’s get after it.
The reduction in the headline tariff rate on China from 145
percent to 30 percent extended the rally in stocks last week
and should help to support both corporate and consumer
confidence. More importantly, the 90-day détente came at a
critical juncture, in my view, as a few more weeks of what was
essentially a trade embargo would have likely led to a recession.
Equity market volatility also subsided considerably amid the
decline in trade policy uncertainty. In fact, both measures
peaked well before the deal with China came together and are now
back below where they were pre-Liberation Day. To me, this means
trade headwinds have likely peaked in rate of change terms and
are unlikely to return to such levels again. This would fit with
the capitulatory price action we saw in early April with the
average stock in the S&P 500 experiencing a 30 percent
drawdown. In short, while the lagging hard data is likely to come
in softer over the next coming months, the equity market already
priced it in April. In the event of a recession that still
arrives, we think the April lows will still hold, assuming it's a
mild one with manageable risk to credit and funding markets.
As further support for stocks, earnings revisions breadth appears
to have bottomed. This indicator has leading properties in
terms of the direction of earnings forecasts and is an important
gauge of corporate confidence, in our view. The combination of
upside momentum in revision breadth and last week's deal with
China has placed the S&P 500 firmly back in our original
pre-Liberation Day first half range of 5500-6100. Having said
that, we think continued upward progress in earnings revisions
breadth into positive territory will be necessary to break
through 6100 in the near term, given the stickiness of 10-year
Treasury yields.
Amidst these developments, we released our mid -year outlook
earlier this week and updated our base, bear and bull case
targets for the S&P 500. In short, we effectively pushed out
the timing of our original 6500 price target for the end of
this year to 12 months from today. This is mainly due to a less
dovish Fed and therefore higher 10-year Treasury yields than our
economists and rates strategists expected at the end of last
year. We also trimmed our EPS forecasts modestly to adjust for
higher than expected tariff rates, at least for now.
Looking ahead, we are more bullish today than we were at the end
of last year given the growth negative policy announcements are
now behind us and the Fed’s next move is likely to be multiple
cuts. In short, the rate of change on earnings revisions breadth,
interest rates and policy changes from the administration are all
now pointing in a positive direction, the opposite of six months
ago and why I was not bullish on the first half of this year.
The near-term risk for U.S. equities remains very overbought
conditions and interest rates. With the Fed on hold due to
lingering inflation concerns and Moody’s downgrade of U.S.
Treasury debt last Friday, 10-year Treasury yields are back above
4.5 percent; the level where the correlation between equities and
rates tends to move back into negative territory. Ultimately, we
think the Treasury and Fed have tools they can and will use to
manage this risk. However, in the short term, this is a potential
catalyst for the S&P 500 to take a break and even lead to a 5
percent correction. We would look to add equity risk into
such a correction should it materialize given our bullish
6-12-month view.
Thanks for tuning in. I hope you found it informative and useful.
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