Our CIO and Chief U.S. Equity Strategist Mike Wilson unpacks why
stocks are likely to stay resilient despite uncertainties related
to Fed rates, government shutdown and tariffs.
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 recent concerns for equities and how
that may be changing.
It's Monday, November 10th at 11:30am in New York.
So, let’s get after it.
We’re right in the middle of earnings season. Under the surface,
there may appear to be high dispersion. But we’re actually seeing
positive developments for a broadening in growth. Specifically,
the median stock is seeing its best earnings growth in four
years. And the S&P 500 revenue beat rate is running 2 times
its historical average. These are clear signs that the earning
recovery is broadening and that pricing power is firming to
offset tariffs.
We’re also watching out for other predictors of soft spots. And
over the past week, the seasonal weakness in earnings revision
breath appears to be over. For reference, this measure troughed
at 6 percent on October 21st, and is now at 11 percent. The
improvement is being led by Software, Transports, Energy, Autos
and Healthcare.
Despite this improvement in earnings revisions, the overall
market traded heavy last week on the back of two other risks. The
first risk relates to the Fed's less dovish bias at October's
FOMC meeting. The Fed suggested they are not on a preset course
to cut rates again in December. So, it’s not a coincidence the
U.S. equity market topped on the day of this meeting. Meanwhile
investors are also keeping an eye on the growth data during the
third quarter. If it’s stronger than anticipated, it could mean
there’s less dovish action from the Fed than the market expects
or needs for high prices.
I have been highlighting a less dovish Fed as a risk for stocks.
But it’s important to point out that the labor market is also
showing increasing signs of weakness. Part of this is directly
related to the government shutdown. But the private labor data
clearly illustrates a jobs market that's slowing beyond just
government jobs. This is creating some tension in the markets –
that the Fed will be late to cut rates, which increases the risk
the recovery since April falls flat.
In my view, labor market weakness coupled with the
administration's desire to "run it hot" means that ultimately the
Fed is likely to deliver more dovish policy than the market
currently expects. But, without official jobs data confirming
this trend, the Fed is moving slower than the equity market may
like.
The other risk the market has been focused on is the government
shutdown itself. And there appears to be two main channels
through which these variables are affecting stock prices. The
first is tighter liquidity as reflected in the recent decline in
bank reserves. The government shutdown has resulted in fewer
disbursements to government employees and other programs. Once
the government shutdown ends which appears imminent, these
payments will resume, which translates into an easing of
liquidity.
The second impact of the shutdown is weaker consumer spending due
to a large number of workers furloughed and benefits, like SNAP,
halted. As a result, Consumer Discretionary company earnings
revisions have rolled over. The good news is that the shutdown
may be coming to an end and alleviate these market
concerns.
Finally, tariffs are facing an upcoming Supreme Court decision.
There were questions last week on how affected stocks were
reacting to this development. Overall, we saw fairly muted
relative price reactions from the stocks that would be most
affected. We think this relates to a couple of variables. First,
the Trump administration could leverage a number of other
authorities to replace the existing tariffs. Second, even in a
scenario where the Supreme Court overturns tariffs, refunds are
likely to take a significant amount of time, potentially well
into 2026.
So what does all of this all mean? Weak earnings seasonality is
coming to an end along with the government shutdown. Both of
these factors should lead to some relief in what have been softer
equity markets more recently. But we expect volatility to persist
until the Fed fully commits to the run it hot strategy of the
administration.
Thanks for tuning in; I hope you found it informative and useful.
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