Our CIO and Chief U.S. Equity Strategist Mike Wilson discusses
how market volatility over the last month will affect equity
markets as earnings season begins.
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, I
will discuss what to expect from Equity markets as we enter the
heart of earnings season.
It's Monday, April 28th at 11:30am in New York.
So, let’s get after it.
The S&P 500 tested both the lower and upper ends of our
5000-5500 range last week, reinforcing the notion that we remain
in a volatile trading environment. Incrementally positive news on
a potential tariff deal with China and hope for a more dovish Fed
lifted stocks into the end of the week, and the S&P 500
closed slightly above the upper end of our range. While a
modest overshoot of 5500 can persist very short-term, a
sustainable break above this level is dependent on developments
that have yet to come to fruition.
Those include a tariff deal with China that brings down the
effective rate materially; a more dovish Fed; 10-year Treasury
yields falling below 4 percent without recessionary risks
increasing; and a clear rebound in earnings revisions. Bottom
line, until we see clear positive shift in one or more of these
factors, range trading is likely to continue with risks to
the downside given that we are now at the top end of the
range.
A frequent question we're getting from clients is does the soft
data matter for equities or is the market waiting for the hard
data to make up its mind in terms of an upside or downside
breakout above or below this range? Our view has been consistent
that the most important macro data at this stage is from the
labor market while the most important micro data are earnings
revisions. Equities have already priced a meaningful slowdown in
growth relative to expectations.
What's not priced is a labor cycle or recession. While this risk
has been reduced to some extent given the recent, more dovish
tone shift on tariffs from the administration, it's far
from extinguished. Until we see clear evidence over multiple
months that the labor market remains solid, a recession will
likely remain a coin toss. One soft data point to pay attention
to this week that could move the market is the April ISM
Manufacturing data on May 1st. Recall this series accelerated the
August 2024 selloff ahead of a soft July payroll report.
The most important takeaway from an equity strategy perspective
is to stay up the quality curve. No matter what the hard
data says, we remain in a late cycle backdrop where both quality
and large cap relative outperformance should continue. While
uncertainty remains higher than usual, defensives should continue
to do well. However, given their relative outperformance over the
past year, it also makes sense to pick spots in high quality
cyclicals that have already discounted a material slowdown in
both macro conditions and earnings.
To be clear, this is not a blanket call on cyclicals; it's a
selective, stock-specific one. More specifically, look for
quality, cyclical stocks that are more de-risked based on what
the stocks are pricing from a forward earnings growth
standpoint. See our written research for stock screens.
And from a global standpoint, we recommend favoring U.S. over
international equities at this point as a weaker dollar should
benefit U.S. relative earnings revisions, particularly versus
Europe and Japan. Furthermore, less volatile earnings growth and
a higher quality bias should benefit the U.S. on a relative basis
in today's late cycle backdrop.
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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