Our CIO and Chief U.S. Equity Strategist Mike Wilson
explains why history, technicals and fundamentals suggest a
clearer runway for U.S. stocks six months out, despite
geopolitical concerns.
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 conflict in
Iran and what it means for equities.
It's Monday, March 9th at 11:30 am in New York.
So, let’s get after it.
While most believe the current equity market correction began in
February, it's clear to me that it actually began last fall when
liquidity began to tighten. In fact, back in September I warned
that the Fed was not doing enough with the balance sheet – and
financial conditions were likely to tighten and cause some stress
in equities. Starting in October, that stress manifested as
a sharp correction in the most speculative parts of the equity
market and crypto currencies. The Fed responded by ending its
balance sheet reduction earlier than expected and restarting
asset purchases which led to strong equity performance in
January.
At this point, the correction is very well advanced in both time
and price, with many stocks down 30 percent, or more. Meanwhile,
dispersion has rarely been higher with the spread between winners
and losers the highest we have seen in 20+ years. As usual, the
markets got it right by anticipating many of the concerns that
are now obvious to all. The questions for equity investors now
are what will the world look like in six months and are prices
cheap enough to start assuming a better future?
The short answer is not yet, but get your shopping lists ready.
In many ways, we find ourselves in a very similar position to
last year. Recall that the major indices started to accelerate
lower in Late February and early March. The concern at the
time was centered around tariffs, but like today, equity markets
had already been trading poorly for months on concerns that had
nothing to do with tariffs. This time around, markets have been
worried about AI labor disruption, private credit defaults and
liquidity shortages long before the Iran conflict
escalated.
Corrections typically don’t end until the best stocks and highest
quality indices get hit and that usually takes a bigger shock,
like Liberation Day or war. That process has begun with the
S&P 500 having its worst week since October. The other thing
to consider is that market levels tend to be tied to where they
were a year ago. This year-over-year comparison is very important
when thinking about support.
Given the sharp decline last year, it tells me we have another
month during which the equity markets are likely to struggle.
Based on this simple observation and other technical indicators,
I think the S&P 500 could trade toward 6300 by early April
before our favorable fundamental outlook can take hold
again.
Does this mean we shouldn’t worry about the conflict in Iran
taking oil prices sustainably above $100? No, but since no
one seems to be able to predict the outcome of military conflicts
or oil prices, I am not going to try either. Instead, I am going
to assume that in six months, things have likely settled down
after this initial surge, much like we saw after Russia invaded
Ukraine. Importantly, the spike in oil prices is the result
of a logistical logjam in the Straits of Hormuz rather than a
shortage of supply. That logjam is a real constraint, but
necessity is the mother of ingenuity and will likely be
solved.
Another reason to be optimistic six months out is the broadening
in earnings growth, a trend that remains intact and a key call in
our 2026 outlook. Secondarily, the US is much more resilient than
Asia and Europe to an oil shock given its energy independence.
This should attract investor flows back to the US. And finally,
tax incentives for capital spending and tax cuts for individuals
in the [One] Big Beautiful Bill should provide a positive offset
to the higher oil prices in the short term. On the negative
side, the flight to quality and safety could lead to more US
dollar strength which is a headwind to global
liquidity.
Bottom line, oil and US dollar strength is likely to persist
until the conflict simmers down. While much of the damage has
likely been done to the most vulnerable parts of the equity
market, the index remains vulnerable to another 5-7 percent
downside in my opinion while crowded stocks could see double
digit declines before a final low appears next month. Remember
market lows happen faster than tops so be ready to add risk in
anticipation of the bull market resuming later this year.
Thanks for tuning in; I hope you found it informative and useful.
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