Equity markets saw big rallies after trade tensions eased over
the weekend. Our CIO and Chief U.S. Equity Strategist Mike Wilson
explains why he’s optimistic that the worst of the market trough
is over.
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 recent tariff
negotiations for equity markets.
It's Monday, May 12th at 11:30am in New York.
So, let’s get after it.
Over the weekend, U.S.-China trade negotiations made better than
expected progress with both sides agreeing to a détente in the
trade war that began just one short month ago. The main
question I’m getting from investors is whether they should trust
this initial agreement, and if it will eventually lead to
something more sustainable? From my perspective, this misses the
more important point for equity investors. To remind listeners,
equity markets trade in the future.
Therefore, the question to ask yourself is do you think things
will be more or less uncertain in six months and will they be
better or worse? The other thing to consider is that stocks
trade on the second derivative, or rate of change, in growth. On
that score, I believe it is likely we saw the trough rate of
change in variables that tend to correlate with stock prices the
most.
More specifically, earnings revisions breadth showed a meaningful
uptick last week for the first time this year. Some of this was
driven by a pull forward in demand during the first quarter ahead
of the tariff announcements that led to better than feared
earnings. In addition, several leading companies posted better
than expected results thanks to a weaker
dollar. Importantly, the translation benefit for U.S.
multinational earnings is likely to be a big earnings tailwind
for the next six months.
Many of the growth negative things we were worried about five
months ago have played out now with Liberation Day marking the
point of maximum negative sentiment and positioning. There is an
adage that equity markets bottom on bad news, and I can’t think
of a better example of that than Liberation Day last
month. Similarly, markets tend to top on good news and this
weekend’s better than expected outcome on trade negotiations with
China could very well lead to a pause in the
rally. Therefore, we would buy dips rather than chase stocks
on days like today. Markets can look forward to the
possibility of growth positive policy changes that still may be
in front of us. Things like tax cut extensions, de-regulation and
resolution of the debt ceiling and budget appropriations for the
next year.
Finally, with the threat of further escalation of tariff rates
now diminished, the Fed can also come back into the picture with
rate cuts sooner than perhaps what the Fed told us last week.
While we don’t know exactly how much the tariffs will impact
inflation over the next year, it is likely to be front-end
loaded. In fact, there is a case to be made that tariffs may
hurt demand and end up being disinflationary. The Fed is likely
to determine this outcome over the summer and could begin to at
least signal rate cuts. Such a move will potentially lead to a
more sustainable rotation towards lower quality, cyclical stocks
and drive animal spirits in a way that many investors were
expecting six months ago but simply jumped the gun.
Bottom line, I feel more confident in our original outlook for
this year for a tough first half, followed by a strong second
one. This outlook was based on our view that AI capex growth was
bound to decelerate this year, while policy changes were likely
to be growth negative to start. Now, we can look forward to
growth positive policy changes and productivity benefits from the
spending on AI that has already taken place. After such a strong
rally, pullbacks are inevitable but unlikely to be anything like
we saw last month. So, buy the dips.
Thank you for choosing to listen. Leave us a review, and let us
know what you think about the podcast. If you enjoy
listening to Thoughts on the Market, tell a friend or
colleague about us today.
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