Episode summary
The Case for Staying Bullish on Equities
Thoughts on the Market (Morgan Stanley)
· · 6 min · Hosts: Mike Wilson
Summary
Mike Wilson argues that the recent pullback in equities is less a warning sign than a setup for the next leg higher, because the market has already discounted a good deal of the near-term risk. He says the cycle has shifted from a rolling recession to a rolling recovery, and that change is being underappreciated by investors who are still focused on the last set of worries instead of the improving earnings backdrop.
He points to the first-quarter correction as evidence that markets did their job: the S&P 500 fell less than 10%, but roughly half of the Russell 3000 saw drawdowns of 20% or more, while forward earnings kept rising. Based on that stronger earnings outlook, Morgan Stanley raised its 12-month S&P 500 target to 8,300 and lifted S&P 500 EPS by about 5%, assuming continued operating leverage, AI adoption, fiscal support, and a broader capex cycle.
Wilson says AI is still more of a margin tailwind than a labor-market shock, with enterprise adoption early and companies becoming leaner rather than overhiring. The main risk to the bull case is not earnings, but liquidity and higher rates, especially around the 4.5% level on the 10-year Treasury. Even so, he says corrections should be used to add exposure to industrials, financials, and consumer discretionary names that benefit from the recovery.
Key takeaways
- Wilson says the market has already done much of the work of pricing in risk, and the bigger mistake now may be becoming too cautious.
- Morgan Stanley raised its 12-month S&P 500 target to 8,300 on higher earnings forecasts, not on richer valuations.
- He says first-quarter earnings were stronger than many expected, with median S&P 500 earnings surprise at 6% and revision breadth back to 22%.
- Wilson argues AI is currently a margin tailwind rather than a labor-market wrecking ball because adoption is still early and firms are controlling hiring.
- He sees liquidity and rising rates as the main short-term threat, with the 4.5% area on the 10-year Treasury important for valuations.
- He recommends adding exposure on dips to industrials, financials, and consumer discretionary stocks that benefit from a rolling recovery.
Notable quotes
“The biggest twist is where we are in the cycle. Last year, we were still coming out of the tail end of a rolling recession”
“Today, we're in a rolling recovery, and that's still underappreciated”
“we raised our 12-month S&P 500 price target to 8,300 based solely on higher earnings forecasts”
“AI looks more like a margin tailwind than a labor market wrecking ball”
“We don't need Fed cuts for the equity market to work”
How the episode opens
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley CIO and chief US equity strategist. Today on the podcast, I'll be discussing our bullish midyear outlook and why stocks have been under pressure more recently.
It's Tuesday, May 19th at 1:30 p.m. in New York. So, let's get after it.
Every cycle has a moment when investors become so focused on the last risk that they miss the next opportunity. I think we're in one of those moments right now. The first half of this year has had a familiar feel to it.
The market weakened under the surface well before the headlines got loud. Investors discovered the new risks after prices had already moved and sentiment got worse just as the forward setup was getting better. In other words, it's deja vu all over again, but with some important twists.
The biggest twist is where we are in the cycle. Last year, we were still coming out of the tail end of a rolling recession. Today, we're in a rolling recovery, and that's still underappreciated.
This matters because it changes how we should interpret the correction earlier this year and the powerful rally. In the first quarter, many investors looked at the S&P 500's less than 10% price decline and concluded the market was complacent. I think that really misses the point.
Roughly half of the Russell 3000 saw draw downs of 20% or more. And the S&P 500 forward price earnings multiple fell by 18% from its peak as forward earnings continued to rise. That's not complacency.
That's a market doing what it does best, discounting risk before the narrative catches up. And those risks were not small. We had private credit concerns and a major debate around AI disruption to labor markets as well as a new war that drove oil prices up by 100%.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- staying bullish on equities
- stock market pressure
- earnings outlook
- ai impact on markets
- equity strategy
Watch the episode
Watch “The Case for Staying Bullish on Equities” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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