Our CIO and Chief U.S. equity strategist Mike Wilson discusses
investors’ outlook following last week’s Fed meeting, and lists
the key signals to gauge whether stocks can fully rebound from
the recent correction.
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 the recent rally in stocks and why it
can continue.
It's Monday, March 24th at 11:30am in New York.
So let’s get after it.
Last week's Fed meeting appeared to come as a relief to many
market participants as Chair Powell seemed to downplay concerns
about inflation, offering a bit more emphasis on the growth side
of the Fed’s mandate. The Fed also made the decision to slow the
pace of balance sheet runoff, a development that came sooner than
some expected and indicated the Fed is ready to act, if
necessary. Looking ahead, investors are now very focused on the
April 2nd reciprocal tariff deadline. While this catalyst could
offer some incremental clarity on tariff rates and countries and
products in scope, we think it's more a starting point for tariff
negotiations – as opposed to a clearing event. In short, a Fed
put seems closer to being in the money than a Trump put though it
probably would require material labor weakness or choppier credit
and funding markets.
So far, DOGE firings have had little impact on data like jobless
claims or the overall unemployment rate. There may also be a lag
between when employees are laid off and when these individuals
show up as unemployed, given that severance is offered to most.
The more important question for labor markets is whether the
recent decline in the stock market, fall in confidence and rise
in economic trade uncertainty will lead to layoffs in the private
economy. Our economists' base case assumes that these factors
won't drive an unemployment cycle this year; but payrolls,
claims, and the unemployment rate will be critical to monitor to
inform that view going forward.
As usual, looking at the S&P 500 alone does not fully
describe the magnitude of the correction in equities. As I noted
last week, equity markets got as oversold in this correction as
they were during the bear market of 2022. One could ask: Is this
the bottom or the beginning of something more severe? In our
experience, it’s rare for volatility to end when price momentum
is at its lows. However, you can get strong rallies from these
conditions which is why we expected one to begin when the S&P
500 reached the bottom end of our first half trading range of
5500 on March 13th. Since then, stocks have rallied with lower
quality, higher beta equities leading the bounce, so far. We
believe that can continue in the near-term even though we are
still advocating higher quality stocks in one's core portfolio
for the intermediate term – given weakness in earnings revisions
since last November.
More specifically, earnings revisions have remained in negative
territory for the major U.S. averages all year and have not yet
showed signs of bottoming. However, we are starting to see some
interesting shifts in revisions trends under the surface. The
most notable change here is that the Magnificent 7 earnings
revisions look to be stabilizing after a steep decline. This
could halt the underperformance of these mega cap stocks in the
near term as we head into earnings season and this would help
stabilize the S&P 500, in line with our call from two weeks
ago.
It could also help to attract flows back into the U.S. In our
view, one of the reasons why we've seen capital rotate to
international markets is that the high-quality leadership cohort
of the U.S. equity market began to underperform. So, if this
group regains relative strength we could see a rotation back to
the U.S.
Finally, the weaker U.S. dollar could also reverse the relative
earnings revisions downtrend between U.S. and European companies.
If you remember, at the end of last year, the U.S. dollar was
very strong and provided a headwind to U.S. relative revisions
when companies reported fourth quarter results, as we previewed.
This may be going the other way for first quarter results season
and drive money back to the U.S., at least
temporarily.
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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