Podcast Summary: "Is the Correction Over Yet?"

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Is the Correction Over Yet?
• Release Date: March 17, 2025

1. Introduction

In the episode titled "Is the Correction Over Yet?" Morgan Stanley's Chief Investment Officer and Chief U.S. Equity Strategist, Mike Wilson, delves into the recent equity market downturn. Released on March 17, 2025, the podcast provides a comprehensive analysis of the market's current state, underlying causes of the correction, and future outlook.

2. Current Market Status

Mike Wilson opens the discussion by highlighting the significant downturn in major U.S. equity indices:

• Oversold Conditions: "Major US equity indices are as oversold as they've been since 2022" (00:30).
• Bearish Sentiment: Sentiment positioning gauges indicate a bearish outlook.
• Seasonal Factors: Despite the bearish indicators, seasonals typically improve in the second half of March, potentially aiding earnings revisions and price adjustments.
• Dollar Weakness: Recent declines in the dollar could boost first-quarter earnings and second-quarter guidance, offering a tailwind compared to fourth-quarter results.
• Interest Rates: Falling rates may benefit economic surprises.

Wilson maintains his stance that the S&P 500's support at 5,500 could lead to a tradable rally, primarily driven by lower-quality, higher-beta stocks that have experienced the most significant sell-offs.

3. Technical Analysis

Wilson provides an in-depth technical assessment of the market:

• Significant Index Damage: "There has been significant damage to the major indices, more than what we witnessed in other recent 10% corrections like last summer" (02:15).
• Moving Averages Breached: Major indices such as the S&P 500, NASDAQ 100, and Russell 1000 have fallen below their 200-day moving averages, transforming these averages from support levels to resistance barriers.
• Russell 2000 Performance: The Russell 2000 has dropped below its 200-week moving average for the first time since the 2022 bear market, with many stocks nearing a 20% correction.
• Repair Time: This level of technical damage suggests a prolonged recovery period, even without further index-level price declines.

4. Drivers of the Correction

Wilson explores the factors contributing to the ongoing market correction:

• Policy Announcements: Institutional investors are particularly concerned about tariff announcements and rapid policy changes from the new administration, which are dampening sentiment and confidence.

• Pre-existing Conditions: The correction was initiated in December due to multiple factors:

  1. Valuation Concerns: "Stocks were extended on a valuation basis and relative to the key macro and fundamental drivers like earnings revisions, which peaked in early December" (03:10).
  2. Federal Reserve Actions: The Fed held steady in mid-December after aggressively cutting rates by 100 basis points over the preceding three months.
  3. AI Capex Growth: A slowdown in AI capital expenditures was anticipated, with current developments in sequencing (SEQ) becoming a consideration for investors.
  4. Additional Factors: Issues such as immigration enforcement, unexpected efficiency in government departments, and tariffs have further pressured growth expectations, leading to lower equity multiples.

• Presidential Influence: President Trump's recent statements indicate a diminished focus on the stock market as a policy barometer, exacerbating technical breakdowns in major indices.

5. Forecast and Outlook

Wilson outlines his expectations for the market's near-term and longer-term trajectories:

• Short-Term Rally: A brief rally from the 5,500 level on the S&P 500 is likely, bolstered by lower-quality stocks. "A short term rally from our targeted 5500 level is looking more likely after Friday's price action" (04:25).
• Sustainability Challenges: This rally is not expected to evolve into a sustained recovery due to ongoing growth headwinds and the need for monetary policy adjustments.
• Earnings Revisions: The most critical factor remains earnings revisions. Wilson emphasizes that "Earnings revisions are the most important variable," and a positive trend is unlikely to resume for a few more quarters.
• Policy Changes: Potential positive policy shifts, such as tax cuts, deregulation, reduced crowding out, and lower yields, may emerge in the second half of the year but are too distant to influence current market sentiment.
• Fed Put vs. Trump Put: While the “Fed put” remains active, it may only come into play if conditions worsen in areas like growth or credit markets, neither of which initially benefits equities. The “Trump put” appears nonexistent, removing an additional layer of market support.

6. Conclusion

Mike Wilson concludes that while a short-term rally is achievable, the path to a more durable recovery is fraught with challenges. Persistent growth headwinds and the need for favorable monetary policies will dictate the market's future direction. The transition from a government-heavy economy to a more privately driven one promises long-term benefits for many stocks, but the journey is expected to be gradual and uneven.

Notable Quotes:

• "Major US equity indices are as oversold as they've been since 2022." (00:30)
• "There has been significant damage to the major indices, more than what we witnessed in other recent 10% corrections like last summer." (02:15)
• "Earnings revisions are the most important variable." (04:25)

Timestamps Reference:

• 00:30: Overview of oversold conditions and bearish sentiment.
• 02:15: Detailed technical analysis of index performance.
• 03:10: Discussion on drivers of the market correction.
• 04:25: Forecasting the short-term rally and sustainability challenges.

This summary encapsulates Mike Wilson's analysis of the current market correction, the technical and fundamental factors at play, and the cautious outlook for the near future. For those seeking a nuanced understanding of recent market dynamics, this episode provides valuable insights from Morgan Stanley's strategic perspective.