Episode Overview

Theme:
In this episode of Thoughts on the Market, Mike Wilson, Morgan Stanley CIO and Chief U.S. Equity Strategist, provides an update on U.S. equities as earnings season unfolds. Wilson explores the shifting risks for stocks, the fading effects of both earnings seasonality and the government shutdown, and looming volatility as the Federal Reserve's intentions remain uncertain.

Key Topics & Insights

1. Positive Signals for Earnings Growth

• Despite ongoing market anxiety, Wilson emphasizes underlying strength in earnings:
  • "The median stock is seeing its best earnings growth in four years, and the S&P 500 revenue beat rate is running two times its historical average." (00:28)
  • This suggests an expanding earnings recovery, with particular strength in pricing power countering tariffs.

2. Sector-Specific Recovery

• Earnings revision breadth—a key sentiment indicator—is improving across several industries:
  • "The improvement is being led by software, transports, energy, autos and health care." (01:03)
  • Seasonal weakness in earnings revisions appears to have passed, increasing optimism for continued growth.

3. Market Risks: The Fed and Growth Data

• The market has been weighed down by two main risks:
  • Fed’s Less Dovish Stance:
    • After the October FOMC meeting, the Fed signaled it would not commit to further rate cuts for December.
      • "It's not a coincidence that the US Equity market topped on the day of this meeting." (01:39)
    • Strong third quarter growth data may further reduce the case for more dovish policies, potentially stifling equity advances.
  • Labor Market Slowing:
    • "The labor market is also showing increasing signs of weakness." (02:02)
    • Private sector job data point to a broader slowdown, not solely due to government shutdown effects.
    • This creates "tension in the markets that the Fed will be late to cut rates, which increases the risk the recovery since April falls flat." (02:23)

4. The Government Shutdown’s Dual Impact

• Liquidity Tensions:
  • Shutdown has cut government disbursements, draining liquidity:
    • "Once the government shutdown ends, which appears imminent, these payments will resume, which translates into an easing of liquidity." (02:58)
• Consumer Weakness:
  • Furloughs and halted benefits (e.g., SNAP) have crimped consumer spending.
  • Consumer discretionary earnings have "rolled over" but should recover once the shutdown ends.

5. Tariff Developments and Supreme Court Decision

• The upcoming Supreme Court decision regarding tariffs is being watched, but stock reactions have been muted:
  • "The Trump administration could leverage a number of other authorities to replace the existing tariffs." (03:31)
  • If tariffs are overturned, potential refunds would be delayed—relief may not come until 2026.

Notable Quotes & Memorable Moments

• On Underlying Market Strength:
  • "The median stock is seeing its best earnings growth in four years." (00:28)
• On Persistent Risks:
  • "The Fed is moving slower than the equity market may like." (02:20)
• On Shutdown Relief:
  • "The good news is that the shutdown may be coming to an end and alleviate these market concerns." (03:12)
• On Volatility Ahead:
  • "We expect volatility to persist until the Fed fully commits to the run it hot strategy of the administration." (03:56)

Important Segment Timestamps

• 00:00 – 01:10: Earnings season trends, broadening of recovery, sector leaders.
• 01:10 – 02:20: Risks from the Fed’s stance, impact of economic data, labor market concerns.
• 02:20 – 03:12: Government shutdown impacts on liquidity and consumer spending.
• 03:12 – 03:46: Tariff developments and anticipated timelines for relief.
• 03:46 – 04:12: Summary outlook: relief and volatility ahead.

Episode Takeaway

Mike Wilson strikes an optimistic note about the broadening earnings recovery as key sectors outperform and the government shutdown nears resolution. However, the episode underscores that volatility is not likely to subside until the Federal Reserve more clearly signals its willingness to support a "run it hot" economic strategy—a tension that investors should watch in the months ahead.