Podcast Summary: "How Wall Street Is Weathering the Tariff Storm"

Podcast Information

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
• Episode Title: How Wall Street Is Weathering the Tariff Storm
• Release Date: July 14, 2025

Introduction

In the July 14, 2025 episode of Thoughts on the Market, Mike Wilson, Morgan Stanley's Chief Investment Officer (CIO) and Chief U.S. Equity Strategist, delves into the resilience of the equity markets amidst ongoing tariff challenges. The discussion centers on why stocks have maintained their strength despite new tariff announcements and explores various factors contributing to this phenomenon.

Equity Market Resilience Amid Tariffs

Mike Wilson opens the conversation by addressing the surprising resilience of the equity markets in the face of fresh tariff measures. He highlights three primary reasons for this robustness:

1. Limited Import Cost Exposure:

   • Quote: “The import cost exposure for S&P 500 industries is more limited given the deferrals and exemptions still in place like the USMCA compliant imports from Mexico.” (00:45)

   Wilson explains that many S&P 500 companies have a reduced burden from import costs due to existing deferrals and exemptions, particularly those compliant with the US-Mexico-Canada Agreement (USMCA). This mitigation has cushioned the potential negative impact of tariffs on these firms.

2. Perception of Tariff Rates as Temporary:

   • Quote: “Higher tariff rates recently announced... are generally not perceived to be the final rates.” (01:15)

   He further elaborates that the newly imposed tariff rates are viewed as provisional. As negotiations progress, Wilson anticipates these tariffs will resemble a 10% consumption tax on imports, primarily serving as a revenue generator for the U.S. Treasury rather than a lasting trade barrier.

3. Pre-Stocked Inventories:

   • Quote: “Many companies pre-stocked inventory before the tariffs were levied...” (01:40)

   Companies had anticipated potential tariff impositions and consequently stocked up on inventory. This strategic move means the increased costs from higher-priced goods have not yet impacted the cost of goods sold, allowing companies to maintain profitability in the short term.

Earnings Revisions and Market Optimism

Wilson shifts focus to the positive developments in earnings revisions, which have significantly bolstered market confidence:

• V-Shaped Rebound in Earnings Revisions:

  • Quote: “The dramatic V-shaped rebound in earnings revision breadth for The S&P 500 has been a fundamental tailwind...” (02:10)

  He notes that since April, there has been a notable recovery in earnings revision breadth for the S&P 500, transitioning from a negative spread of -25% to a positive 3%. This turnaround has been a critical driver supporting the equity rally, even amid ongoing trade and macroeconomic uncertainties.

• Sector Highlights:

  • Quote: “The sectors with the most positive earnings revisions breadth relative to The S&P 500 are financials, industrials, and software...” (02:50)

  Wilson identifies financials, industrials, and software as the top-performing sectors in terms of positive earnings revisions. These sectors are recommended for investors, given their strong performance dynamics and growth prospects.

Legislative Developments Supporting Equities

The discussion then shifts to recent legislative actions that have positively influenced the market:

1. Passage of the "One Big Beautiful Bill":

   • Quote: “While this bill does not provide incremental fiscal spending... it does lower the cash earnings tax rate for companies that spend heavily on both R&D and capital goods.” (03:10)

   The newly passed bill primarily benefits companies engaged in substantial research and development (R&D) and capital expenditures by reducing their cash earnings tax rates. Morgan Stanley's global tax team anticipates that cash tax rates could decrease from the current 20% back to approximately 13%, reviving investments that had slowed under previous tax conditions.

2. Impact on Capital Spending and GDP:

   • Quote: “This benefit is also likely to jumpstart what has been an anemic capital spending cycle...” (03:35)

   The tax incentives are expected to inject vigor into corporate capital spending, potentially driving higher GDP growth and increasing revenues for companies supplying equipment related to capital investments.

3. Foreign Derived Intangible Income (FDII) Safeguards:

   • Quote: “The FDII deduction was scheduled to decrease in 2026... That risk has been eliminated in the big beautiful bill.” (04:00)

   The bill also addresses the FDII provision, which encourages U.S. companies to retain intellectual property domestically. By preventing the scheduled decrease in this deduction, the legislation ensures that companies do not face an unexpected rise in their effective tax rates.

4. Reduction of Digital Service Taxes (DST):

   • Quote: “Canada announced that it would rescind its digital service tax on the US...” (04:30)

   Additionally, the bill includes provisions to reduce digital service taxes imposed on U.S. online companies operating abroad. Canada’s recent decision to rescind its DST is highlighted as a significant win, with expectations that other countries, particularly in Europe, may follow suit as trade negotiations advance.

Conclusion: Positive Drivers Outweigh Tariff Concerns

Mike Wilson concludes by emphasizing that despite ongoing uncertainties surrounding tariffs, multiple positive factors are poised to drive earnings growth over the coming year. The combination of favorable earnings revisions, supportive legislative measures, and strategic corporate behaviors suggests that the recent stock market rally is well-founded. Investors, therefore, may find sustained opportunities without succumbing to complacency.

• Final Quote: “While uncertainty around tariffs remains high, there are many other positive drivers for earnings growth over the next year that could more than offset any headwinds from these policies.” (04:45)

Key Takeaways:

• Limited Impact from Tariffs: Existing deferrals and exemptions reduce immediate costs for S&P 500 companies.
• Temporary Nature of Tariffs: Ongoing negotiations suggest tariffs may act more as revenue measures than permanent trade barriers.
• Strategic Inventory Management: Pre-stocked inventories have insulated companies from immediate cost increases.
• Positive Earnings Momentum: A significant rebound in earnings revisions supports the equity market's strength.
• Legislative Support: Tax reductions and incentives for R&D and capital expenditures are poised to enhance corporate growth.
• Global Tax Harmonization: Reduction in digital service taxes benefits U.S. online companies and may encourage broader international cooperation.

This episode offers a comprehensive analysis of the factors underpinning Wall Street's resilience amid tariff-related challenges, providing valuable insights for investors and market observers alike.

Timestamp Reference:

• Sections marked with MM:SS indicate the approximate time in the transcript where the quoted statement can be found.