What Should Investors Expect from Earnings Season? - Thoughts on the Market

Summary6 min read

Thoughts on the Market: What Should Investors Expect from Earnings Season?

Podcast Information:

Title: Thoughts on the Market
Host/Author: Morgan Stanley
Description: Short, thoughtful, and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
Episode: What Should Investors Expect from Earnings Season?
Release Date: April 28, 2025

Introduction

In the April 28, 2025 episode of Thoughts on the Market, Morgan Stanley's Chief Investment Officer (CIO) and Chief U.S. Equity Strategist, Mike Wilson, delves into the expectations for the equity markets as the earnings season unfolds. With a keen eye on current market volatility and upcoming economic indicators, Wilson provides comprehensive insights aimed at guiding investors through uncertain times.

Current Market Overview

Mike Wilson opens the discussion by highlighting the S&P 500's recent performance, which has been a barometer of the prevailing market volatility.

Volatile Trading Environment:
"The S&P 500 tested both the lower and upper ends of our 5,000 to 5,500 range last week, reinforcing the notion that we remain in a volatile trading environment" (00:45).

Despite facing significant fluctuations, the index closed slightly above its upper threshold, signaling incremental positive momentum driven by external factors.

Key Factors Influencing the Market

Wilson identifies several critical elements that are currently shaping market dynamics:

Tariff Deal with China:
"Incrementally positive news on a potential tariff deal with China... lifted stocks into the end of the week" (00:20).
The anticipation of reduced tariffs has injected optimism, yet the realization of this deal remains a pivotal factor for sustained market gains.
Federal Reserve's Stance:
"Hope for a more dovish Fed lifted stocks into the end of the week" (00:20).
A more accommodative Federal Reserve could lower interest rates, thereby boosting investor confidence.
10-Year Treasury Yields:
"A more dovish Fed will see 10-year treasury yields falling below 4% without recessionary risks increasing" (00:50).
Stability in long-term yields is essential to avoid escalating recession fears, which in turn supports equity valuations.
Earnings Revisions:
"A clear rebound in earnings revisions" (00:50).
Positive revisions in earnings forecasts are critical for underpinning stock prices above key technical levels.

Client Concerns: Soft Data vs. Hard Data

Addressing client inquiries, Wilson distinguishes between soft and hard data and their respective impacts on market movements.

"Does the soft data matter for equities or is the market waiting for the hard data to make up its mind?" (01:30).
Clients are particularly interested in understanding whether preliminary indicators or more concrete economic data will drive market decisions.

Wilson emphasizes that both macro and microeconomic indicators play significant roles, with the labor market and earnings revisions taking precedence in the current context.

Recession Risks and the Labor Market

A substantial portion of Wilson's analysis revolves around the health of the labor market and its implications for potential recession risks.

Labor Market as a Macro Indicator:
"The most important macro data at this stage is from the labor market" (01:00).
Strong labor market data can alleviate fears of an impending recession, while signs of weakness may exacerbate them.
Recession Uncertainty:
"Until we see clear evidence over multiple months that the labor market remains solid, a recession will likely remain a coin toss" (01:20).
The ambiguity surrounding the labor market's trajectory keeps recession risks in play, necessitating cautious investment strategies.

Upcoming Data to Watch

Wilson points to specific upcoming economic reports that could significantly influence market directions.

April ISM Manufacturing Data:
"One soft data point to pay attention to this week that could move the market is the April ISM manufacturing data on May 1st" (01:50).
Historical precedents indicate that ISM manufacturing figures can precipitate substantial market reactions, as seen in the August 2024 sell-off.

Equity Strategy Recommendations

Given the current market landscape, Wilson outlines strategic approaches for investors:

Maintain Quality Exposure:
"The most important takeaway from an equity strategy perspective is to stay up the quality curve" (02:00).
Prioritizing high-quality and large-cap stocks can offer relative stability and outperformance in uncertain times.
Selective Cyclical Investments:
"It also makes sense to pick spots in high quality cyclicals that have already discounted a material slowdown" (02:15).
Investors are advised to selectively invest in cyclical stocks that have mitigated risks through forward earnings growth adjustments.
Defensive Positioning:
"Defensive should continue to do well. However, given their relative outperformance over the past year" (02:00).
While defensive stocks remain attractive, their recent gains suggest a need for cautious selection within this category.

Wilson underscores that these recommendations are not blanket calls but rather nuanced strategies based on specific stock qualities and market conditions.

Global Market Outlook

Shifting focus to the global landscape, Wilson advises a preference for U.S. equities over international counterparts.

U.S. Over International Equities:
"From a global standpoint, we recommend favoring US over international equities at this point as a weaker dollar should benefit US relative earnings revisions" (02:30).
The depreciating dollar is expected to enhance U.S. earnings relative to regions like Europe and Japan, which could face headwinds due to currency dynamics.
Stability in Earnings Growth:
"Less volatile earnings growth and a higher quality bias should benefit the US on a relative basis in today's late cycle backdrop" (02:30).
The U.S. market's relative stability and quality bias provide a competitive edge in the prevailing economic cycle.

Conclusion

Mike Wilson encapsulates his insights by reiterating the importance of strategic quality positioning amidst ongoing market volatility and economic uncertainties. As investors navigate the earnings season, maintaining a focus on macro indicators like the labor market and micro factors such as earnings revisions will be crucial. By adhering to a disciplined approach that emphasizes high-quality and selectively cyclical investments, coupled with a preference for U.S. equities, investors can better position themselves to weather potential downturns and capitalize on favorable market movements.

As Wilson aptly puts it, "In a late cycle backdrop where both quality and large cap relative outperformance should continue while uncertainty remains higher than usual" (02:00), underscores the strategic imperatives for investors in the current market environment.

Transcript Excerpts

Mike Wilson [00:00]: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley CIO and chief U.S. equity strategist...
Mike Wilson [00:20]: Incrementally positive news on a potential tariff deal with China and hope for a more dovish Fed lifted stocks...
Mike Wilson [00:45]: The S&P 500 tested both the lower and upper ends of our 5,000 to 5,500 range last week...
Mike Wilson [01:00]: Our view has been consistent that the most important macro data at this stage is from the labor market...
Mike Wilson [02:00]: The most important takeaway from an equity strategy perspective is to stay up the quality curve...
Mike Wilson [02:30]: From a global standpoint, we recommend favoring US over international equities at this point...
Mike Wilson [03:00]: 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.

Disclaimer: The proceeding 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 all investors.

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[00:01]
A
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley CIO and chief U.S. equity strategist. Today I will discuss what to expect from equity markets as we enter the heart of earnings season. It's Monday, April 28th at 11:30am in New York, so let's get after it. The S&P 500 tested both the lower and upper ends of our 5,000 to 5,500 range last week, reinforcing the notion that we remain in a volatile trading environment. Incrementally positive news on a potential tariff deal with China and hope for a more dovish Fed lifted stocks into the end of the week and The S&P 500 closed slightly above the upper end of our range. While a modest overshoot of 5,500 can persist very short term, a sustainable break above this level is dependent on developments that have yet to come to fruition. Those include a tariff deal with China that brings down the effective rate materially, a more dovish Fed 10 year treasury yields falling below 4% without recessionary risks increasing, and a clear rebound in earnings revisions. Bottom Line until we see clear positive shift in one or more of these factors range trading is likely to continue with risk to the downside. Given that we are now at the top end of the range, a frequent question we're getting from clients is does the soft data matter for equities or or is the market waiting for the hard data to make up its mind in terms of an upside or downside breakout above or below this range? Our view has been consistent that the most important macro data at this stage is from the labor market, while the most important micro data are earnings revisions. Equities have already priced a meaningful slowdown in growth relative to expectations. What's not priced is a labor cycle or a recession. While this risk has been reduced to some extent given the recent more dovish tone shift on tariffs from the administration, it's far from extinguished. Until we see clear evidence over multiple months that the labor market remains solid, a recession will likely remain a coin toss. One soft data point to pay attention to this week that could move the market is the April ISM manufacturing data on May 1st. Recall, this series accelerated the August 2024 sell off ahead of a soft July payroll report. The most important takeaway from an equity strategy perspective is to stay up the quality curve. No matter what the hard data says, we remain in a late cycle backdrop where both quality and large cap relative outperformance should continue while uncertainty remains higher than usual. Defensive should continue to do well. However, given their relative outperformance over the past year. It also makes sense to pick spots in high quality cyclicals that have already discounted a material slowdown in both macro conditions and earnings. To be clear, this is not a blanket call on cyclicals, it's a selective stock specific one. More specifically, look for quality cyclical stocks that are more de risked based on what the stocks are pricing from a forward earnings growth standpoint, see our written research for stock screenshots. And from a global standpoint, we recommend favoring US over international equities at this point as a weaker dollar should benefit US relative earnings revisions, particularly versus Europe and Japan. Furthermore, less volatile earnings growth and a higher quality bias should benefit the US on a relative basis in today's late cycle backdrop. 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.
[03:40]
B
The proceeding 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.