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.