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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 recent rally in stocks and why it can Continue. It's Monday, March 24th at 11:30am in New York, so let's get after it. Last week's Fed meeting appeared to come as a relief to many market participants, as Chair Powell seemed to downplay concerns about inflation, offering a bit more emphasis on the gross side of the Fed's mandate. The Fed also made a decision to slow the pace of balance sheet runoff, a development that came sooner than some expected and indicated the Fed is ready to act if necessary. Looking ahead, investors are now very focused on the April 2nd reciprocal tariff deadline. While this catalyst could offer some incremental clarity on tariff rates and countries and products in scope, we think it's more a starting point for tariff negotiations as opposed to a clearing event. In short, a Fed put seems closer to being in the money than a Trump put, though it probably would require material labor weakness or choppier credit and funding markets. So far, doge firings have had little impact on data like jobless claims or the overall unemployment rate. There may also be a lag between when employees are laid off and when these individuals show up as unemployed. Given that severance is offered to most, the more important question for labor markets is whether the recent decline in the stock market, fall in confidence and rise in economic trade uncertainty will lead to layoffs in the private economy. Our economist base case assumes that these factors won't drive an unemployment cycle this year, but payrolls, claims and the unemployment rate will be critical to monitor to inform that view going forward. As usual, looking at The S&P 500 alone does not fully describe the magnitude of the correction in equities. As I noted last week, equity markets got as oversold in this correction as they were during the bear market of 2022. One could ask, is this the bottom or the beginning of something more severe? In our experience, it's rare for volatility to end when price momentum is at its lows. However, you can get strong rallies from these conditions, which is why we expected one to begin when the S&P 500 reached the bottom end of our first half trading range of 5,500 on March 13th. Since then, stocks have rallied with lower quality, higher beta equities leading the bounce so far. We believe that can continue in the near term, even though we are still advocating higher quality stocks in one's core portfolio for their intermediate term given weakness in earnings revision since last November. More specifically, earnings revisions have remained in negative territory for the major US averages all year and have not yet shown signs of bottoming. However, we are starting to see some interesting shifts in revision trends under the surface. The most notable change here is that the Magnificent seven earnings revisions look to be stabilizing after a steep decline. This could halt the underperformance of these mega cap stocks in the near term as we head into earnings season and this would help stabilize the S&P 500 in line with our call from two weeks ago. It could also help to attract flows back into the U.S. in our view, one of the reasons why we've seen capital rotate to international markets is that the high quality Leadership cohort of the US Equity market began to underperform. So if this group regains relative strength, we could see a rotation back to the U.S. finally, the weaker U.S. dollar could also reverse the relative earnings revisions downtrend between US and European companies. If you remember that at the end of last year the US dollar was very strong and provided a headwind to US Relative revisions when companies reported fourth quarter results as we previewed, this may be going the other way for first quarter results season and drive money back to the US at least temporarily. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.
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