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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley CIO and chief U.S. equity strategist. Today, possible opportunities to look out for in an equity correction over the past few weeks It's Monday, June 15th at 1:30pm in New York, so let's get after it. Sometimes the market changes direction or leadership, not because a story is broken. Instead, it just needs to digest how quickly the story has evolved over the past few weeks. Equities had their biggest correction since the important bottom in March. I don't view this as the end of the bull market, though. I view it as a pause after an unsustainable acceleration in two key factors driving stocks higher this earnings revisions and liquidity. In my view, the market wasn't questioning the earnings bull market as much as it is questioning the speed in which earnings have been revised higher. These revisions have been particularly strong in leading sectors like semiconductors, which also corrected the most when earnings revision breadth gets north of 70%, it's reasonable to ask whether the second derivative is about to slow. That doesn't mean earnings estimates are going down. Instead, it means the rate of improvement is probably peaking. And in markets, it's always about the second derivative in growth. Such decelerations create corrections, not crashes. That distinction is important. Earnings revision breadth may pause or roll over from extreme levels, but the next 12 month earnings estimates are still likely to rise as we move through the year and roll forward toward 2027 numbers. That's why I remain convicted in our year end s and P500 target of 8,000. Even if the next few weeks remain choppy, markets can correct while the earnings story remains intact. In fact, that's often exactly how healthy bull markets reset. The second part of this adjustment is liquidity. Earlier this year, liquidity was flowing strongly through the system as a means of regaining financial stability. Between the Fed's reserve management program, reduced bank capital requirements and treasury buybacks, more than half a trillion dollars of liquidity was effectively added. But that pace is now slowing. The reserve management program has fallen from roughly $40 billion a month in April to about $10 billion today, while treasury buybacks have also slowed from the March and April highs. This rate of change slowdown matters at the margin, especially for crowded momentum trades that have been supported by abundant liquidity. Take note of these corrections in momentum because they often bring change in leadership, and that's the real opportunity. We've already seen a few leadership rotations this year, from precious and base metals to rare earths to energy and finally to semiconductors. Now I think the market may be ready to broaden again, much like it did late last year and the first six weeks of this year. Importantly, our preferred sectors of consumer discretionary goods, transports and regional banks are all up more than 10% over the past month, while the S&P 500 was down modestly. Yet sentiment towards these areas is still muted. That's exactly the kind of setup I like improving fundamentals, better relative price action and investors still skeptical. Another piece that should help this broadening macro variables that have been holding lower quality cyclicals back include interest rates, crude and the dollar. They may all now be peaking. That fits nicely with the announced deal to reopen the Strait of Hormuz last night. If oil pressure eases and the bond market walks back the Fed hike it's currently pricing interest rate sensitive groups should have room to extend their recent outperformance finally, this week's Fed meeting matters too, because it's Kevin Warsh's first as the chair, I'll be watching less for the rate decision itself and more for how the bond market reacts. The key markers are still the same for me, 4.5% on a 10 year treasury bond while bond volatility and funding market stress need to remain calm. If the Iran deal holds, I think the Fed can lean less hawkish on rates, but I don't expect a proactive pivot to add more liquidity. Bottom line, Markets have been digesting the peak rate of change in growth, acceleration and liquidity, but that's far from the end of the cycle. The earnings driven bull market remains intact, but the leadership may be changing. As usual, the best opportunities may be hiding in the places investors don't believe in yet. Thanks for tuning in. 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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