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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 what investors should be doing as we enter the final innings of this equity market Correction. It's Monday, April 6th at 11:30am in New York, so let's get after it. For the past several months my view has been very consistent. In short, I continue to believe we're in a bull market that began last April, coming out of what I've described as a rolling recession between 2022 and 2025. That recovery remains intact despite recent threats from AI disruption, private credit and a new war in Iran. While the war between Russia and Ukraine persists, markets have not been complacent with stocks correcting since last fall. In fact, it's well advanced with the S&P 500's forward price earnings multiple declining by 18%, a rare move outside of a recession or a Fed tightening cycle, neither of which is likely in my view. Meanwhile, earnings growth isn't rolling over. Instead it's accelerating to multi year highs and that's a key difference versus past periods when oil shocks led to a recession. And in the absence of that outcome, I see a market that's discounted a lot of bad news. Beneath the surface, the damage has been even more significant, with over half of the stocks down at least 20% from their highs and many down 30 to 40%. Resets of this scale usually occur near the end of corrections, not the beginning. The S&P 500 bounced last week off the 6,300 to 6,500 range of support that I've been highlighting. Could we retest those levels? Sure, especially if rates push higher or geopolitical risks escalate further. However, I don't see a meaningful breakdown. If anything, what's still missing, and what I'd actually like to see is a bit more de risking in crowded trades like semiconductors and memory stocks. In particular, that kind of repositioning reset is often required to seal a durable bottom. So if we're in the later innings, the next question is where do you want to be? For me, it's about balance and I think the right approach is a barbell of cyclicals and quality growth. On the cyclical side, I like financials, consumer discretionary and industrials. These are the areas where earnings momentum remains strong and valuations have come down meaningfully. It's also what was leading prior to the start of the Iran conflict and reflects our core view that we are still in the early stages of a recovery from the rolling recession. Last week's jobs report supports that view, with private payrolls increasing by 186,000, one of the largest rises in three years. On the growth side, I'm focused on the hyperscalers as a very good risk reward. At this point, these companies are trading at roughly the same multiple as defensive sectors like Staples, but with more than three times the earnings growth. Meanwhile, the sentiment positioning is as bad as it's been since 2022's bear market, when these companies were showing negative earnings growth. So what could go wrong? The main risk to equities is still rates and central bank policy, not the war. We know this because we just flipped back into a regime where stocks and yields are negatively correlated, where higher rates put pressure on valuation. 4.5% on a 10 year treasury bond continues to be a key threshold where stock valuations are likely to get worse before they rebound durably. Furthermore, bond volatility and Fed expectations are driving tighter financial conditions, and that's been the real source of market stress lately. But here's the irony that tightening is also what ultimately sets up a more dovish pivot from the Fed and other central banks. If financial conditions tighten too much, the Fed has the flexibility to respond, and we have plenty of evidence that there's willingness to do that over the past several years. Bottom line, the market has already done a lot of the hard work. It's priced in geopolitical risk, private credit concerns and even negative side effects from AI, which is ultimately a productivity enhancing technology. What we're dealing with now is the final hurdle policy, rate levels and volatility. And once we get through that, I think the path forward becomes a lot clearer. But remember, markets don't wait for certainty, they move ahead of it. You should too. 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.
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