Morgan Stanley's Chief US Equity Strategist, Mike Wilson, continues to assert that the market is in a bull phase, having begun in April and emerging from a "rolling recession" that spanned 2022 to 2025. He highlights a broadening out of the market, with several economic sectors that were previously in recession now beginning to recover. Wilson remains optimistic about the trajectory of the S&P 500, setting a year-end target of 7,800.
Wilson notes that the market has already factored in significant negative news, including geopolitical tensions, private credit concerns, and the potential impact of AI. He points to accelerating earnings growth, contrasting with past oil shock-induced recessions, as a key differentiator. Despite some parts of the market showing frothiness, he believes that the overall risk-reward profile remains favorable, particularly in areas with positive earnings revision breadth like industrials and financials.
The strategist acknowledges that market volatility is a normal characteristic of a bull market and anticipates potential corrections, especially in the third quarter. He emphasizes that dips should be viewed as buying opportunities in this early stage of the new bull market. Key to the continued bullish trend, according to Wilson, is a positive rate of change in earnings growth and supportive fiscal and monetary policies, with the Federal Reserve's next move expected to be a cut, even if not immediate.
Wilson stresses that interest rates and central bank policy remain the primary risk to equities, rather than geopolitical conflicts. He identifies 4.5% on a 10-year Treasury bond as a crucial threshold, beyond which equity multiples tend to suffer. He argues that the market has largely completed the necessary adjustments and once the final hurdles of policy, rate levels, and volatility are cleared, the path forward for the bull market will become much clearer. He also notes that over half of stocks are down at least 20% from their highs, indicating that significant resets have already occurred.
Wilson's strategy for navigating the current market involves a "barbell" approach, combining cyclicals like financials, consumer discretionary, and industrials, which show strong earnings momentum and attractive valuations, with quality growth stocks such as hyperscalers. He sees hyperscalers as offering a good risk-reward, trading at multiples similar to defensive sectors but with three times the earnings growth. He also mentions an unsustainably high level of earnings revision breadth in the semiconductor sector, signaling a potential near-term rollover.
