Our CIO and Chief U.S. Equity Strategist Mike Wilson discusses
the outlook for stocks after the preliminary U.S.-China trade
agreement and ahead of the Fed meeting and big tech earnings.
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 remaining hurdles for
equities after what appears to be a preliminary trade deal with
China.
It's Monday, October 27th at 11:30am in New York.
So, let’s get after it.
Over the past few weeks, trade tensions between the U.S. and
China escalated once again focused on rare earths and technology
transfers with each country playing its strongest card. Over the
weekend, it appears that we have at least a preliminary agreement
to de-escalate these tensions which means avoiding prohibitively
high tariffs that were scheduled to go on at the end of this
month.
While we don’t have many details on what has been agreed to, it
appears that critical rare earths will continue to ship to the
U.S. while technology transfer restrictions by the U.S. to China
will ease. Presumably, Fentanyl tariffs of 20 percent on China
are likely to be part of any broader agreement between Presidents
Trump and Xi, if they end up meeting at the upcoming Asia Pacific
Economic Cooperation forum.
Given the sharp sell-off in stocks a few weeks ago on the news of
trade tensions re-escalating, it’s not surprising that stocks are
rallying sharply this morning on news of a possible deal from
last week’s talks.
Our attention now turns to the other big events this week. First,
the Federal Reserve is meeting tomorrow and Wednesday to decide
its next move on monetary policy. There is a broad consensus view
that the Fed will cut another 25 basis points but there are very
different views about how they will address its balance sheet
run-off known as quantitative tightening, or QT.
Based on my conversations, there is a growing consensus view for
the Fed to announce the end of QT but uncertainty around the
timing. Our house view is for the Fed to wait until the January
meeting to make this official with an end of the program in
February. Others believe the Fed could announce something as
early as this week.
That dispersion in expectations does create some room for
disappointment from markets, especially given the recent increase
in funding market spreads. More specifically, the widening in
spreads suggests banking reserves may already be too low and
restrictive for the pick-up in economic activity and capital
spending that requires more liquidity.
Second, earnings revision breadth has rolled over sharply the
past few weeks. Most of this decline is due to normal seasonality
and the fact that revisions breadth had reached unsustainably
high levels since bottoming out in April. Therefore, a reset
should be expected as we previewed over a month ago.
Nevertheless, it needs to stabilize and push higher again for
stocks to continue their advance in my view.
Perhaps most importantly for the S&P 500 is the fact that all
of the hyperscalers are reporting this week and will likely
determine if revision breadth rebounds. It will also be important
to see how those stocks react to what is likely to be continued
aggressive guidance on AI capex plans. Since April, the
hyperscaler stocks have rewarded higher guidance on spending.
Should that change, we may see a different tone to how these
companies discuss their spending plans.
Bottom line, I remain bullish on my 12 month view for U.S. stocks
based on what I believe will be better and broader growth in
earnings next year. Nevertheless, the near term window remains a
bit cloudy on trade, Fed policy shifts and earnings revisions
breadth. Stay patient with new capital deployment and look to
take advantage of downdrafts when they arise like a few weeks
ago.
Thanks for tuning in; I hope you found it informative and useful.
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