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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 discuss where there's the most pushback to our mid year outlook and why I remain convicted in our generally constructive view on US equities for the next 12 months. It's Monday, June 2nd at 11:30am in New York, so let's get after it. To briefly summarize our outlook, we've maintained our 6,512 month price target for the S&P 500 this year despite what has been a very volatile first five months both in terms of news flow and price action. Part of the reason we didn't change this view stems from the fact that we expected the first half to be challenging for US Stocks but to be followed by a more favorable second half. Much of this was related to our view that the new administration would pursue the growth negative part of their policy agenda. First, this played out with their focus on immigration enforcement and spending cutbacks and tariffs. In addition to these policy adjustments, we also expected AI Capex to decelerate in the first half after such fast growth last year. All these factors conspired to weigh on both economic growth and earnings revisions. Second, the way in which tariffs were rolled out on Liberation Day was a shock to most market participants, including us, and served as the perfect catalyst for what can only be described as capitulation selling by many institutional investors. That capitulation has set the stage for the very reflexive snapback in equity prices that is also supported by a positive rate of change on policy, earnings revision breadth, financial conditions and a weaker US Dollar. The main pushback to our view centers on our constructive earnings outlook for high single digit growth both this year and next, and our view that valuations can remain elevated at 21.5 times forward earnings. On the earnings front, our calendar year earnings estimates already incorporate a mid single digit percent hit the bottoms up consensus forecasts. Second, our leading earnings indicator which projects earnings per share growth 12 months out, is suggesting a sideways consolidation in growth in the high single digit range over the next year. Third, a weaker dollar elements of the tax bill and AI driven productivity should be incremental tailwinds for earnings that are not in our model. Fourth, we've experienced rolling recessions for many sectors of the private economy for the last three years, which makes growth comparisons easier. Finally, and most importantly, the rate of change on earnings revisions breadth has inflected higher from a very low level after a year long downturn on valuation. Our work shows that if earnings growth is above the long term median of 7% and if the Fed Funds rate is down on a year over year basis, it's very rare to see multiple compression. In fact, price earnings multiples have expanded 90% of the time under these conditions to the tune of 9% over a 12 month period. Therefore, in many ways we're being conservative with our forecast For S&P 500's price earnings ratio to remain flat at current levels over the next year. With respect to our favorite valuation metric, the equity risk premium, it's interesting to note that in the week following Liberation Day, the equity risk premium reached the same level we witnessed in the aftermath of the 911 shock in 2001 and even exceeded the risk premium reached during the Long Term Capital management crisis in 1998. Both episodes resulted in 20% corrections to the S&P 500, much like we experienced this year, only to be followed by very strong equity markets over the next year. The bottom line is that I remain convicted in both our earnings forecast for high single digit earnings growth for this year and next, and my view that valuations can remain elevated in this classic late cycle expansion of slower economic growth that typically elicits interest rate cuts from the Fed. 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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