Stocks hold steady as tariff uncertainty continues. Our CIO and Chief U.S. Equity Strategist Mike Wilson explains how policy deferrals, earnings resilience and forward gu...
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing why stocks remain so resilient.
It's Monday, July 14th at 11:30am in New York.
So, let’s get after it.
Why has the equity market been resilient in the face of new tariff announcements? Well first, the import cost exposure for S&P 500 industries is more limited given the deferrals and exemptions still in place like the USMCA compliant imports from Mexico. Second, the higher tariff rates recently announced on several trading partners are generally not perceived to be the final rates as negotiations progress. I continue to believe these tariffs will ultimately end up looking like a 10 percent consumption tax on imports that generate significant revenue for the Treasury. And finally, many companies pre-stocked inventory before the tariffs were levied and so the higher priced goods have not yet flowed through the cost of goods sold.
Furthermore, with the market’s tariffs concerns having peaked in early April, the market is looking forward and focused on the data it can measure. On that score, the dramatic v-shaped rebound in earnings revisions breadth for the S&P 500 has been a fundamental tailwind that justifies the equity rally since April in the face of continued trade and macro uncertainty. This gauge is one of our favorites for predicting equity prices and it troughed at -25 percent in mid-April. It’s now at +3 percent. The sectors with the most positive earnings revisions breadth relative to the S&P 500 are Financials, Industrials and Software — three sectors we continue to recommend due to this dynamic.
The other more recent development helping to support equities is the passage of the One Big Beautiful Bill. While this Bill does not provide incremental fiscal spending to support the economy or lower the statutory tax rate, it does lower the cash earnings tax rates for companies that spend heavily on both R&D and Capital Goods.
Our Global Tax Team believes we could see cash tax rates fall from 20 percent today back toward the 13 percent level that existed before some of these benefits from the Tax Cuts and Jobs Act that expired in 2022. This benefit is also likely to jump start what has been an anemic capital spending cycle for corporate America, which could drive both higher GDP and revenue growth for the companies that provide the type of equipment that falls under this category of spending.
Meanwhile, the Foreign-Derived Intangible Income is a tax incentive that benefits U.S. companies earning income from foreign markets. It was designed to encourage companies to keep their intellectual property in the U.S. rather than moving it to countries with lower tax rates. This deduction was scheduled to decrease in 2026, which would have raised the effective tax rate by approximately 3 percent. That risk has been eliminated in the Big Beautiful Bill.
Finally, the Digital Service Tax imposed on online companies that operate overseas may be reduced. Late last month, Canada announced that it would rescind its Digital Service Tax on the U.S. in anticipation of a mutually beneficial comprehensive trade arrangement with the U.S. This would be a major windfall for online companies and some see the potential for more countries, particularly in Europe, to follow Canada’s lead as trade negotiations with the U.S. continue.
Bottom line, while uncertainty around tariffs remains high, there are many other positive drivers for earnings growth over the next year that could more than offset any headwinds from these policies. This suggests the recent rally in stocks is justified and that investors may not be as complacent as some are fearing.
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!
Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why investors have largely remained calm amid recent developments in the Middle East.
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing how to think about the tensions in the Middle East for U.S. equities.
It's Monday, June 23rd at 11:30am in New York.
So, let’s get after it.
Over the weekend, the United States executed a surprise attack on Iran’s nuclear enrichment facilities. While the extent of the damage has yet to be confirmed, President Trump has indicated Iran’s nuclear weapon development efforts have been diminished substantially, if not fully. If true, then this could be viewed as a peak rate of change for this risk. In many ways this fits our overall narrative for U.S. equities that we have likely passed the worst for many risks that were weighing on stocks in the first quarter of the year. Things like immigration enforcement, fiscal spending cuts, tariffs and AI CapEx deceleration all contributed to dragging down earnings forecasts.
Fast forward to today and all of these items have peaked in terms of their negative impact, and earnings forecasts have rebounded since Mid-April. In fact, the rebound in earnings revision breadth is one of the sharpest on record and provides a fundamental reason for why U.S. stocks have been so strong since bottoming the week of April 7th. Add in the events of this past weekend and it makes sense why equities are not selling off this morning as many might have expected.
For further context, we looked at 23 major geopolitical events since 1950 and the impact on stock prices. What we found may surprise listeners, but it is a well understood fact by seasoned investors. Geopolitical shocks are typically followed by higher, not lower equity prices, especially over 6 to12 months. Only five of the 23 outcomes were negative. And importantly, all the negative outcomes were accompanied by oil prices that were at least 75 percent higher on a year-over-year basis. As of this morning, oil prices are down 10 percent year-over-year and this is after the actions over the weekend. In other words, the conditions are not in place for lower equity prices on a 6 to12 month horizon.
Having said that, we continue to recommend large cap higher quality equities rather than small cap lower quality names. This is mostly a function of sticky long term interest rates and the fact that we remain in a late cycle environment in which the Fed is on hold. Should that change and the Fed begin to signal rate cuts, we would pivot to a more cyclical areas of the market.
Our favorite sectors remain Industrials which are geared to higher capital spending for power and infrastructure, Financials which will benefit from deregulation this fall and software stocks that remain immune from tariffs and levered to the next area of spending for AI diffusion across the economy. We also like Energy over consumer discretionary as a hedge against the risk of higher oil prices in the near term.
Thanks for tuning in; I hope you found today's episode 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!
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast, I’ll be discussing why we remain more constructive than the consensus on large cap U.S. equities – and which sectors in particular.
It's Monday, June 16th at 9:30am in New York.
So, let’s get after it.
We remain more constructive on U.S. equities than the consensus mainly because key gauges we follow are pointing to a stronger earnings backdrop than others expect over the next 12 months. First, our main earnings model is showing high-single-digit Earnings Per Share growth over the next year. Second, earnings revision breadth is inflecting sharply higher from -25 percent in mid-April to -9 percent today. Third, we have a secondary Earnings Leading model that takes into account the cost side of the equation; and that one is forecasting mid-teens Earnings Per Share growth by the first half of 2026. More specifically, it’s pointing to higher profitability due to cost efficiencies.
Interestingly, this was something we heard frequently last week at the Morgan Stanley Financials Conference with many companies highlighting the adoption of Artificial Intelligence to help streamline operations. Finally, the most underappreciated tailwind for S&P 500 earnings remains the weaker dollar which is down 11 percent from the January highs. As a reminder, our currency strategists expect another 7 percent downside over the next 12 months.
The combination of a stronger level of earnings revisions breadth and a robust rate of change on earnings revisions breadth since growth expectations troughed in mid-April is a powerful tailwind for many large cap stocks, with the strongest impact in the Capital Goods and Software industries.
These industries have compelling structural growth drivers. For Capital Goods, it’s tied to a renewed focus on global infrastructure spending. The rate of change on capacity utilization is in positive territory for the first time in two and a half years and aggregate commercial and industrial loans are growing again, reaching the highest level since 2020. The combination of structural tech diffusion and a global infrastructure focus in many countries is leading to a more capital intensive backdrop. Bonus depreciation in the U.S. should be another tailwind here – as it incentivizes a pickup in equipment investment, benefitting Capital Goods companies most directly. Meanwhile, Software is in a strong position to drive free cash flow via GenAI solutions from both a revenue and cost standpoint.
Another sector we favor is large cap financials which could start to see meaningful benefits of de-regulation in the second half of the year. The main risk to our more constructive view remains long term interest rates. While Wednesday's below consensus consumer price report was helpful in terms of keeping yields contained, we find it interesting that rates did not fall on Friday with the rise in geopolitical tensions. As a result, the 10-year yield remains in close distance of our key 4.5 percent level, above which rate sensitivity should increase for stocks. On the positive side, interest rate volatility is well off its highs in April and closer to multi-year lows.
Our long-standing Consumer Discretionary Goods underweight is based on tariff-related headwinds, weaker pricing power and a late cycle backdrop, which typically means underperformance of this sector. Staying underweight the group also provides a natural hedge should oil prices rise further amid rising tensions in the Middle East. We also continue to underweight small caps which are hurt the most from higher oil prices and sticky interest rates. These companies also suffer from a weaker dollar via higher costs and a limited currency translation benefit on the revenue side given their mostly domestic operations.
Finally, the concern that comes up most frequently in our client discussions is high valuations. Our more sanguine view here is based on the fact that the rate of change on valuation is more important than the level. In our mid-year outlook, we showed that when Earnings Per Share growth is above the historical median of 7 percent, and the Fed Funds Rate is down on a year-over-year basis, the S&P 500's market multiple is up 90 percent of the time, regardless of the starting point.
In fact, when these conditions are met, the S&P's forward P/E ratio has risen by 9 percent on average. Therefore, our forecast for the market multiple to stay near current levels of 21.5x could be viewed as conservative. Should history repeat and valuations rise 10 percent, our bull case for the S&P 500 over the next year becomes very achievable.
Thanks for tuning in; I hope you found this episode 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!
Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh. Morgan Stanley's, head of European Research Product. And I'm joined by my colleagues Mike Wilson, Morgan Stanley's, CIO and Chief US Equity Strategist and Marina Zavolock, our Chief European Equity Strategist.
Investors are asking if Europe can sustain its recent stock market outperformance against the US or if we are poised for a tactical reversal. And today's episode is going to be a special kind of face off looking at the relative merits of our US equity strategy views against our European stock market views as well.
It's Wednesday, April the 2nd at 9:30am in London.
Our clients love the face-off work that we do, and I think today we've really got the ultimate face-off looking at the relative merits of our US equity strategy views, and our European stock market views as well. So, when I think about year-to-date, Mike, so I'm gonna start with you.
Europe's obviously done pretty well. I mean, we've seen clearly defense and banks being the main thrust of that performance relative to the US. And when we look at US equities, and I think this has been very consistent, honestly, with the views that you've been expressing since the start of the year. There's been weakness there driven by a range of factors that I think everybody listening in and will understand and are well documented.
But the key from my side is I sense you think there may be a tactical opportunity here, and that we could be on the cusp of seeing something of a rotation back into US equity. So, I wanted to hear your views. How they're evolving and if you think there's a real tactical opportunity here?
Mike Wilson I've not really been surprised at how the US equity market has traded this year, given our view in the sequencing of policy. I think the surprise for me anyways is just how much Europe has gone up. And I think a lot of that just has to do with flows and flows of capital.
So, I mean to me the question for whether this is going to be, you know, kind of a structural change is like, what's really driving the outperformance in the near term? Is this something that is, you know, temporary or is it something that's more secular and structural? And I think it's probably both. And the reality is that it probably overshot a bit in the initial move here.
And I wanna just back up and kind of talk about the US has been the biggest outperformer for a decade. And it's been driven by, you know, kind of a handful of stocks or, you know, the large cap growth segment.
And I think it's interesting to just point out that that's a global phenomenon, right? Meaning the high-quality growth stocks in Europe have also done really, really well. It's just there's not as many of them. And similarly in Asia. The real story here is just that, you know, large cap quality growth and even somewhat defensive have just carried the day – kind of post 2021; but really over the last 10 years.
And the question is why? Well because organic growth has really not been that good. It's been very subsidized by government spending, other policy measures and, you know, it's this crowding out feature that we've written about extensively. And that crowding out has led investors to essentially shun bonds and buy high quality stocks. So now, at the end of last year, we had a couple of headwinds to this theme from a US perspective.
First off. The Fed stopped cutting interest rates in December. Number two, the fiscal impulse is reversing because it was unsustainable. The other one that doesn't get a lot of airtime, but some people have been talking about, including us, is just the peak rate of change in AI CapEx really occurred in the fourth quarter and now it's decelerating.
It doesn't mean we have negative growth; it just means deceleration. But you know, growth stocks key off of that and that has driven revision breath to be quite negative in the US for the first time, really in, you know, several years. And also, on a relative basis.
So, I would argue that a relative performance of Europe over the US is really related directly to that relative earnings revision breadth, where Europe has been better relative to the US.
And then I think the bigger question is, you know, what happens after that? So, we think there's another 3, 4, 5 percent of relative value here for US S&P 500 over say Euro stocks in US dollar terms. And then I guess I'd lastly just point out that the dollar itself was a big part of this move; a dollar Euro exchange rate, which was very strong at the end of last year.
And that was a headwind for earnings growth in US, for US companies and a tailwind for European companies. That now is reversed, as a dollar has weakened substantially against a Euro. So, I think, you know, Marina will talk about this as well. You know, we believe that the relative earnings revision breadth between the US and Europe could reverse in Q1, really just on that currency exchange rate getting weaker now towards the dollar and stronger for the Euro.
Paul Walsh: Second question for you, Mike, before we move on to Marina, to understand the sort of tactical view around Europe. You talked about, you know, the bigger question is what happens after that? And you are referring to this sort of relative pickup in the US versus Europe. So, I wanted to cast our eyes a little bit further out. How are you thinking about the outlook for the US equity space as we kind of cast our gaze towards the end of this year and moving into 2026?
Mike Wilson: Well, I think that there's two ways to think about this. First of all, it's the index itself or the S&P 500, the highest quality index in the world versus say the average stock.
Okay? And, you know, a lot of things have helped the S&P 500 that are unique.
Lower tax rates in the US. Think about the operational efficiency of which companies have, you know, operated in the US. They're a little bit more, I think, shareholder-focused.
And so, the question is, you know, could there be a reversal in some of those relative trends? And I think the answer is yes, meaning, Europe could lower taxes. They could lower regulation. They could create incentives for businesses to operate more freely. And, you know, those two on a relative basis, even if the US just keeps doing what they've been doing, the relative opportunity set looks a little bit larger.
So I think there's an opportunity for two things to happen. The average company could do better than say the index, once we had this transition, which is gonna take another probably six or 12 months. And then secondarily, we could see a diversification of ownership away from the US, back towards other countries, not just Europe, by the way. That could be Asia. That could be emerging markets. And I think the key there is gonna be what happens to the US dollar.
So even if you don't believe this story, a global investor needs to be rotating back. They, they need to have better diversification in their portfolio because it is gonna be an uncertain world for probably a period of time as you go through a major transition here. This multipolar world that, that you know, is continuing to evolve. Maybe back to a mercantilist type environment, something we haven't seen in 30 years. And then the currency, there could be some sort of a currency accord, which would, force the redistribution of assets away from the US to other parts of the world.
Paul Walsh: Mike, thanks for that. How are you thinking, Marina, about the tactical situation here for European equities after this strong run that we've seen so far this year?
Marina Zavolock: The key question that we're getting is about earnings.
So, as we head into the one 1Q earning season, a lot of investors are asking, will Europe have this kind of outperformance in earnings that we saw last quarter? So just to remind last quarter, European earnings revisions breadth really outperformed the US. They basically diverge in opposite directions.
Going into this earning season. You literally have the opposite dynamics. So you have the dollar that's depreciated by about 5 percent. That's not gonna flatter European earnings versus the US.
The last thing I'll mention here is that on this kind of higher spending and excitement on Germany, we really like Germany structurally. We think that this increased fiscal spending is a game changer. But we've also done a lot of analysis, comparing to the infrastructure investment in Jobs Act in the US and basically have found that what you tend to have at this point of the recent rally that you had in exposed stocks to, for example, the infrastructure fund is a travel and arrive situation.
And pretty much the next positive catalyst we expect in Germany are going to be with the release of the budget when we get more details on how the money will be spent. And that's not until May or June.
Paul Walsh: Okay, thanks for that, Marina. So you've laid out, I think, very clearly the tactical view on Europe.
So How should we also be thinking about the medium-term, sort of, structural dynamics for European equities in that, sort of, relative global context?
Marina Zavolock: One thing we like to track really closely is the like for like discount of Europe versus the US.
And the reason we track it closely is because this discount travels within a pretty stable downwards range. So, over the last 10 years or so, we've seen European discounts versus the US widening structurally, and they've been doing that within a range.
And the question for me, which I think you're asking is. Are we gonna break outta this range?
I don't think we're gonna break out at this very moment but I think it is possible that we break out possibly in the second half of this year. I think there are a lot of important dynamics and, you know, changes, let's say happening in Europe.
I think that's really important because part of the reason Europe's outperformed is because investors are worried about the level of concentration of the US in their indices.
So if you have this kind of dynamic of repatriation back to Europe and you have this continued diversification theme later this year. I think after we pass this earning season, that could propel Europe to maybe structurally breakout versus the US, rather than just have a tactical rally.
So, this kind of renewed self-reliance of Europe investing in European's future, it, it can become a very bullish story. So, I don't think this kind of tactical pullback we're seeing right now is the end of the story.
Paul Walsh: Mike Marina, thank you both very much for taking the time to talk; and to our listeners out there, as always, thank you for taking the time to tune in. If you enjoy Thoughts on the Market, please do leave us a review wherever you listen. And be sure to share the podcast with a friend or colleague today.
