Our CIO and Chief U.S. Equity Strategist Mike Wilson explains the
stock market tumble and whether investors can hope for a rally.
----- 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 Equity Market correction
and what to look for next.
It's Monday, March 17th at 11:30am in New York.
So let’s get after it.
Major U.S. equity Indices are as oversold as they've been since
2022. Sentiment, positioning gauges are bearish, and seasonals
improve in the second half of March for earnings revisions and
price. Furthermore, recent dollar weakness should provide a
tailwind to first quarter earnings season and second quarter
guidance, particularly relative to the fourth quarter results;
and the decline in rates should benefit economic
surprises. In short, I stand by our view that 5,500 on the
S&P 500 should provide support for a tradable rally led by
lower quality, higher beta stocks that have sold off the most,
and it looks like it may have started on Friday.
The more important question is whether such a rally is likely
to extend into something more durable and mark the end of
the volatility we’ve seen YTD? The short answer is – probably
not.
First, from a technical standpoint there has been significant
damage to the major indices—more than what we witnessed in recent
10 per cent corrections, like last summer. More
specifically, the S&P 500, Nasdaq 100, Russell 1000 growth
and value indices have all traded straight through their
respective 200-day moving averages, making these levels now
resistance, rather than support. Meanwhile, many stocks are
closer to a 20 per cent correction with the lower quality Russell
2000 falling below its 200 week moving average for the first time
since the 2022 bear market. At a minimum, this kind of
technical damage will take time to repair, even if we don’t get
additional price degradation at the index level.
In order to forecast a larger, sustainable recovery, it’s
important to acknowledge what’s really been driving this
correction. From my conversations with institutional investors,
there appears to be a lot of focus on the tariff announcements
and other rapid-fire policy announcements from the new
administration. While these factors are weighing on
sentiment and confidence, other factors started this correction
in December.
In our year ahead outlook, we forecasted a tougher first half of
the year for several reasons. First, stocks were extended on
a valuation basis and relative to the key macro and fundamental
drivers like earnings revisions, which peaked in early December.
Second, the Fed went on hold in mid-December after aggressively
cutting rates by 100 basis points over the prior three months.
Third, we expected AI capex growth to decelerate this year and
investors now have the DeepSeek development to consider. Add in
immigration enforcement, the Department of Government Efficiency
(DOGE) exceeding expectations, and tariffs – and it’s no surprise
that growth expectations are hitting equities in the form of
lower multiples.
As noted, we highlighted these growth headwinds in December and
have been citing a first half range for the S&P 500 of
5500-6100 with a preference for large cap quality. Finally,
President Trump has recently indicated he is not focused on the
stock market in the near term as a barometer of his policies and
agenda. Perhaps more than anything else, this is what led to the
most recent technical breakdown in the S&P 500.
In my view, it will take more than just an oversold market to get
more than a tradable rally. Earnings revisions are the most
important variable and while we could see some seasonal strength
or stabilization in revisions, we believe it will take a few
quarters for this factor to resume a positive uptrend. As noted
in our outlook, the growth-positive policy changes like tax cuts,
de-regulation, less crowding out and lower yields could arrive
later in the second half of the year – but we think that’s too
far away for the market to contemplate for now.
Finally, while the Trump put apparently doesn’t exist, the Fed
put is alive and well, in our view. However, that will
likely require conditions to get worse either on growth,
especially labor, or in the credit and funding market, neither of
which would be equity-positive, initially.
Bottom line, a short-term rally from our targeted 5500 level is
looking more likely after Friday’s price action. It’s also being
led by lower quality stocks. This helps support my secondary
view that the current rally is unlikely to lead to new highs
until the numerous growth headwinds are reversed or monetary
policy is loosened once again. The transition from a government
heavy economy to one that is more privately driven should
ultimately be better for many stocks. But the path is going to
take time and it is unlikely to be smooth.
Thanks for listening. If you enjoy the podcast, leave us a review
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friend or colleague today.
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