Loading summary
Transcript2 lines
- [00:01]
A
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley's CIO and Chief US Equity Strategist. Today, on the podcast, I'll explain why the recent volatility in markets makes Sense. It's Wednesday, July 22nd at 2pm in New York, so let's get after it. The broadening trade is back and it's gaining steam. We established this thesis last week. Importantly, there's a key reason this broadening trade is likely to continue. One of the more crowded areas of the market, semiconductors, has lost its momentum. As I've noted before, this is not a call that the AI cycle is over. However, stocks do trade on the rate of change in growth, and expectations often reach a place where they can no longer surprise on the upside. Earnings revisions tend to get too stretched and capital starts looking for a next place where the fundamentals are improving but positioning is still light. This is no different than what happened to other leadership groups earlier this year in areas like precious metals and energy stocks. Remember, I first made the call for market broadening in our November outlook. My view is that the economy had moved into a new expansion after the rolling recession ended in April of 2025, and markets were starting to catch on before the Iran conflict interrupted that trend. Investors piled into the AI trademark, especially semis, as oil prices jumped and fed expectations shifted more hawkish. But back in June, I noted that those earnings revisions were likely nearing their peak. Hyperscaler stocks started to lag was the first indication. Since semis ultimately depend on hyperscaler spending, that divergence usually doesn't last. It doesn't mean the build out is ending. However. The spenders may be moving from blind enthusiasm to a more disciplined phase as a means of addressing the market's concerns about falling cash flows. We've seen this pattern before. Since ChatGPT launched, this ebbing and flowing between the hyperscaler and semi stocks has happened three times. This is the fourth such adjustment during which the hyperscaler stocks are likely to outperform the semis. Since a few weeks back, hyperscalers have outperformed semiconductors by almost 30%. Another consequence is that the major averages may trade lower in the near term. When a crowded large cap leadership group is unwinding, the index can look choppy even as the market underneath is improving. That's the key distinction. The index may struggle, but the broadening can still work. Over the next month, don't be surprised if The S&P 500 trades as low as 7,000 before it makes a move to 8,000 by year end. Use this weakness to add to equity positions. I continue to like consumer discretionary goods, transports and biotech Discretionary goods remains one of the cleaner expressions of the broadening thesis. Wallet share is shifting from services back toward goods. Goods pricing is improving and earnings revisions are strengthening. Transports continue to show improving revisions as volumes stabilize and pricing gets better. And biotech is one of the more attractive lower rate beneficiaries, especially if policy expectations are too hawkish, as I think they are. On that last point, the Fed backdrop matters. The June FOMC meeting told us forward guidance is going to be limited and the inflation path is going to drive policy. The softer than expected inflation data last week should allow the Fed to stay on hold rather than hiking. It may take the bond market a few more data points to fully reprice this view. Bottom line, the broadening is in gear, but it may not feel comfortable because it's happening while the crowded momentum trade unwinds, a process that is likely unfinished. That's usually how rotations in market leadership work. Like spring, it's often in like a lion and out like a lamb. 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.
- [04:01]
B
The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.