How Stocks Could React to a Fed Pivot - Thoughts on the Market

Summary4 min read

Thoughts on the Market — “How Stocks Could React to a Fed Pivot”

Host: Mike Wilson, CIO and Chief U.S. Equity Strategist at Morgan Stanley
Date: August 25, 2025

Episode Overview

Mike Wilson delves into the Federal Reserve’s new policy signals, particularly following the Jackson Hole symposium, and analyzes potential impacts on U.S. equity markets. He reflects on the implications of a likely Fed rate cut in September, explores market reactions to dovish signals, and outlines risks and opportunities for investors as the S&P 500 approaches a milestone target.

Key Discussion Points & Insights

1. Market Anticipation of a Fed Pivot

Bond & Equity Market Reaction ([00:24])
- Over recent months, markets have strongly anticipated a Fed pivot to a more dovish stance.
- Bond markets are pricing in a high likelihood of September rate cuts, fueling equity rallies.
- Mike Wilson says,
  
  “The bond market started to price in a very high likelihood for the Fed to start cutting interest rates again in September. Equities have taken their cues… by trading higher through most of the summer.”
  [00:22]

2. Insights from Jackson Hole Symposium ([00:55])

Fed’s Policy Signals
- The Fed appears closer to cutting rates in September; Powell voiced a notably dovish tone.
- The shift occurred after uncertainties about whether Powell would remain hawkish pending clearer inflation data.
- Wilson notes,
  
  “Clearly, Powell leaned more dovish and with markets a bit nervous going into his speech on Friday morning, equities rallied sharply the rest of the day.”
  [01:19]
Changes to Inflation Targeting
- The Fed announced an end to ‘average’ inflation targeting. Now, the 2% annual target is firm—no tolerance for swings above or below for averaging purposes.
- This signals willingness to act quickly if inflation accelerates or economy strengthens unexpectedly.

3. Outlook and Near-Term Risks ([02:04])

Bullish Medium-Term View
- Wilson maintains a bullish stance for coming weeks, anticipating the Fed cuts will support stocks further.
- S&P 500 is approaching a 6500 target set by Morgan Stanley.
Key Near-Term Risks
- Fed Pause Risk: If growth or inflation surprises on the upside and the Fed decides not to cut, a small correction is likely.
  
  “That would be worth a small correction in stocks given the high likelihood of a cut that is now priced in.”
  [02:19]
- Market Scepticism of Cuts: If the Fed cuts but markets doubt its seriousness on inflation, bond yields could spike, causing a sharper equity drawdown.
- Control Concerns: Prolonged misalignment between treasury yields and Fed policy could lead to deeper volatility.

4. Bull Market Context & Investment Strategy ([02:49])

The End of the Bear Market
- April marked the conclusion of the bear market; Wilson believes a new bull cycle began then.
- New bull markets typically last 1–2 years, not just four months, so pullbacks are likely buying opportunities.
  
  “What that means is that any dips we get this fall are likely to be buying opportunities for longer term investors.”
  [03:03]
Earnings Revisions as a Bullish Signal
- Earnings revisions are moving sharply higher, reinforcing the bullish outlook.
Time Horizon Differences
- The Fed’s reliance on backward-looking economic data contrasts with equity investors who look at companies’ forward guidance.
- Wilson points out this explains divergence between stock prices and Fed actions:
  
  “Equity investors look at company data and guidance, which is forward looking. This fact alone explains the wide divergence between equity prices and Fed decisions, which tend to be late and after.”
  [03:22]

5. Bottom Line & Thesis ([03:36])

12-Month Outlook
- Wilson remains bullish on equities over the next year, based on strong company performance and positive market signals.
- Encourages listeners to view any near-term dips as entry opportunities.

Notable Quotes & Memorable Moments

“A major bear market ended in April and a new bull market began. It’s rare for new bull markets to last only four months, and more likely they last one to two years at a minimum.”
— Mike Wilson, [02:54]
“Earnings revisions continue to move sharply higher. The Fed uses economic data to make its decisions, and that data is generally backward looking. Equity investors look at company data and guidance, which is forward looking.”
— Mike Wilson, [03:16]

Timestamps for Key Segments

00:00 — Introduction & Episode Theme
00:22 — Market reactions to Fed pivots and summer rally
00:55 — Takeaways from Jackson Hole; Powell’s dovish turn
01:44 — Change in inflation targeting framework
02:04 — Market outlook, S&P 500 approaching 6500 target
02:18 — Risks if the Fed holds rates steady or bond market sells off
02:54 — The end of the bear market; beginning of a new bull market
03:16 — Divergence between equity and Fed perspectives
03:36 — 12-month bullish thesis and closing thought

Summary

Mike Wilson provides a concise yet comprehensive breakdown of how new Fed policy signals—especially potential rate cuts and changes to inflation targeting—are shaping equity markets. While maintaining a bullish stance on stocks, Wilson highlights key risks tied to Fed actions and market expectations, ultimately encouraging investors to see any autumn corrections as buying opportunities in the context of a nascent bull market.

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Transcript2 lines

[00:01]
A
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley CIO and chief U.S. equity strategist. Today on the podcast I'll be discussing the Fed's new signaling on policy and what it means for stocks. It's Monday, August 25th at 11:30am in New York, so let's get after it. Over the past few months, the market started to anticipate a Fed pivot to a more dovish stance this fall. More specifically, the bond market started to price in a very high likelihood for the Fed to start cutting interest rates again in September. Equities have taken their cues from the signaling in the bond market by trading higher through most of the summer. Despite lingering concerns about tariffs, international conflicts and valuation, I have remained bullish throughout this period given our focus on historically strong earnings revisions and the view that the Fed's next move would be to cut rates. And even if the timing remained uncertain, last week the Fed held its annual symposium in Jackson Hole where they typically discuss near term policy intentions as well as larger considerations for their strategic policy framework. We learned two key things. First, the Fed seems closer to cutting rates in September than the last time Chair Powell spoke publicly. This change also comes after a week in which the markets were left wondering if he would remain more hawkish until inflation data confirm what markets have already figured out. Clearly, Powell leaned more dovish and with markets a bit nervous going into his speech on Friday morning, equities rallied sharply the rest of the day. Second, the Fed also indicated that it will no longer target average inflation at 2%. Instead it will make 2% the target at all times. This means the Fed will not tolerate inflation above or below target to manage the average like it did in 20, 21 and 22. It also suggests a more hawkish Fed should the economy recover more strongly than is currently expected or inflation reaccelerates. From my standpoint, this is bullish for stocks over the next few weeks and markets can now fully anticipate Fed cuts in September. However, I see a few risks for September and October worth thinking about as The S&P 500 approaches our long standing 6500 target. The first risk is the Fed decides to not cut rates after all because either growth is better or or inflation is higher than expected. That would be worth a small correction in stocks given the high likelihood of a cut that is now priced in. The second risk is the Fed cuts, but the bond market decides it's being too carefree about inflation and longer term bonds sell off a sharp rise in 10 year treasury yields would likely elicit a bigger correction in stocks until the treasury and Fed regain control. Here's the important message I want to leave you with A major bear market ended in April and a new bull market began. It's rare for new bull markets to last only four months, and more likely they last one to two years at a minimum. What that means is that any dips we get this fall are likely to be buying opportunities for longer term investors. What gives us even more confidence in that statement is that earnings revisions continue to move sharply higher. The Fed uses economic data to make its decisions, and that data is generally backward looking. Equity investors look at company data and guidance, which is forward looking. This fact alone explains the wide divergence between equity prices and Fed decisions, which tend to be late and after. Equity markets have already figured out what's going to happen rather than what's in the past. Bottom line, I remain bullish on the next 12 months, given what companies and equity markets are telling us. Thanks for tuning in. I hope you found it informative and useful. Let us know what you think by leaving us a review and if you find thoughts on the market worthwhile, tell a friend or colleague to try it out.
[03:57]
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