Our CIO and Chief U.S. Equity Strategist Mike Wilson explains the
challenges to growth for U.S. stocks and why some investors are
looking to China and Europe.
----- 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 new headwinds for growth and what that
means for equities.
It's Monday, Feb 24th at 11:30am in New York.
So let’s get after it.
Until this past Friday’s sharp sell off in stocks, the
correlation between bond yields and stocks had been in
negative territory since December. This inverse correlation
strengthened further into year-end as the 10-year U.S. Treasury
yield definitively breached 4.5 per cent on the upside for the
first time since April of 2024. In November, we had identified
this as an important yield threshold for stock valuations. This
view was based on prior rate sensitivity equities showed in April
of 2024 and the fall of 2023 as the 10-year yield pushed above
this same level. In our view, the equity market has been
signaling that yields above this point have a higher likelihood
of weighing on growth. Supporting our view, interest rate
sensitive companies like homebuilders have underperformed
materially. This is why we have consistently recommended the
quality factor and industries that are less vulnerable to these
headwinds.
In our year ahead outlook, we suggested the first half of 2025
would be choppier for stocks than what we experienced last fall.
We cited several reasons including the upside in yields and a
stronger U.S. dollar. Since rates broke above 4.5 per cent in
mid-December, the S&P 500 has made no progress. Specifically,
the 6,100 resistance level that we identified in the fall has
proven to be formidable for the time being. In addition to higher
rates, softer growth prospects alongside a less dovish Fed are
also holding back many stocks. As we have also discussed, falling
rates won’t help if it’s accompanied by falling growth
expectations as Friday’s sharp selloff in the face of lower rates
illustrated.
Beyond rates and a stronger US dollar, there are several other
reasons why growth expectations are coming down. First, the
immediate policy changes from the new administration, led by
immigration enforcement and tariffs, are likely to weigh on
growth while providing little relief on inflation in the short
term. Second, the Dept of Govt Efficiency, or DOGE, is off
to an aggressive start and this is another headwind to growth,
initially.
Third, there appears to have been a modest pull-forward of goods
demand at the end of last year ahead of the tariffs, and that
impulse may now be fading. Fourth, consumers are still feeling
the affordability pinch of higher rates and elevated price
levels which weighed on last month's retail sales data.
Finally, difficult comparisons, broader awareness of Deep Seek,
and the debate around AI [CapEx] deceleration are weighing on the
earnings revisions of some of the largest companies in the major
indices.
All of these items are causing some investors to consider cheaper
foreign stocks for the first time in quite a while – with
China and Europe doing the best. In the case of China, it’s
mostly related to the news around DeepSeek and perhaps stimulus
for the consumer finally arriving this year. The European rally
is predicated on hopes for peace in Ukraine and the German
election results that may lead to the loosening of fiscal
constraints. Of the two, China appears to have more legs to the
story, in my opinion.
Our Equity Strategy in the U.S. remains the same. We see limited
upside at the index level in the first half of the year but
plenty of opportunity at the stock, sector and factor
levels. We continue to favor Financials, Software
over Semiconductors, Media/Entertainment and Consumer
Services over Goods. We also maintain an overriding penchant
for quality across all size cohorts.
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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