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They are gearing up for another week of geopolitical talks, more corporate earnings, and yes, we have all eyes on Fedhairja Powell at the end of the week for any clues on the pace of interest rates. So what does this all mean for the markets? Well, let's go to Mike Wilson, he's chief US equity strategist at Morgan Stanley, for some insight in all this. All right, Mike, I want to start with the Fed's annual retreat in Jackson
Hole this week. What kind of tone do you think Cher J. Powell will take on Friday?
Yeah, I mean, good morning, I think.
I mean it's a quiet time of the year, so you know, at any event is probably going to.
Have a little bit more impact on a short term basis.
I think the expectation going into this particular Jackson Hole meeting is that, you know, Chair Powell is going to remain somewhat balanced because they want to make sure inflation is under control before they start cutting race. Now, the market is pricing in somewhere between eighty and ninety percent chance of a bed in September.
So what I'm going to be watching for.
Is does that change after this meeting, Because if it stays at eighty to ninety percent as we approach the September meeting, the FED will cut, I mean they will. They will not want to disappoint markets. So look, our expectation is still for no cuts this year. As a house, I think, you know, the evidence is sort of building that maybe tariffs aren't going to have as being an impact on inflation.
Is that as a chair is thinking, and.
That should lead to you know, a greater chance of rate cuts in September.
So so that's what we're set up for right now.
And I think if that were to come down to fifty percent, that would be disappointing for markets. So I think this that's that's what we're going to be watching kind of on Friday to see after his initial speech and then into next week.
And sind you mentioned those raycuts, So the FED is being able to digest some more labor market data. The level of unemployment inflation. Is that all playing into your FED rate cut bed as well?
That's right.
I mean our economists have been looking for slowing growth and stickier inflation that's actually played out. I mean it's been That's exactly what has happened, which is why the FED has been on hold this year. But I think, you know, as we look out, the risk of slowing labor looks like a bigger concern than say, sticky inflation. And we all know that FED funds rates are too
high for most businesses and most consumers. I mean, that's why interest rates sensitive parts in the market have been basically stuck in a recession now for the last two or three years, So there is appetite to cut rates.
I think at the FED they just want to make sure.
I think they still have a little you know, PTSD from twenty twenty one. They want to just make sure, and that's what that's the balancing act right now. In the meantime, however, what's really going on is that earning's revisions have been explosive and we've been running with this, you know, really since April, and that's what's been driving
stocks higher. So even in the face of slowing growth, earnings revisions have been fantastic, and companies have sort of done a good job of mitigating some of these risks from the from the terrace.
Now, since you mention earnings, I mean let's go there. We have retail earnings. They're going to be front and center this week. We're talking about Walmart home be below's target. What are you expecting? Is it all about the tariff impact?
Well, that's that's a that's a great question.
So so far terrifts have really not slowed down this earnings train, as I mentioned, but this is the one area where we do believe tariffs could have a negative impact. Is then sort of this consumer discretionary area where these companies don't have a ton of pricing power. We're not seeing as much discounting there, maybe from the exporters themselves. So the question is who's going to eat those terrafts And this is probably where you know companies may may
may see some margin pressure. So this is this is this is probably the bigger risk quite frankly, this week or over the next couple of weeks for for equities.
But that's a very narrow part of the equity market, you know, and as we've said for a long time, you know, my view is that you know, the terriffs themselves will be a shared cost between exporters, importers and consumers where those terraffs can be passed on and we and we were like, out, you know, there are a lot of areas where those tariffs can't be passed on. So uh, you know, that's that's that's that's the risk.
It's a margin risk. And this is the part of the year, the third quarter and the fourth quarter where we'll see some of that margin pressure. But it's very idiosyncratic, right, So it's not as big a riskaurantce to the S and P five hundred, but it is it is for individual companies.
Now, what about Tech? I mean, and some focus this we give a Palo Alto after the close. Have you been impressed with with tech earning so far? And how is Palo Alto going to line up? Yeah?
I mean Tech has been been bouncing back.
Let's not forget one of the big uh you know things we've been riunning about for the last year and a half is that we've been in a very mixed earnings and economic performance overall, meaning we've been going through
sort of a rolling recession. And one of the recessions that have been out there is overall spending on IT campbacks, so away from AI campbacks, and then last year we got a deceleration in AI campbacks starting in December, which is why a lot of those stocks did poorly in the first quarter.
That's an overlooked fact. Everybody thinks it's about you know, terroris, Taris, terrafs. It's not about It's not about terrorfs. There's an AI campax deceleration and in.
April all of that bottom and the overall it campack cycle also about them in our view, So tech earnings have been driven by those two features, and we think that continues.
I think people have been a little too bearish on software.
People have been concerned that, you know, AI is going to eat into some of the software companies, and that may be true over time, but let's not forget that the overall spinning on software has been slowing or even in like I said, a software session for the last couple of years, and now we're.
Coming out of that.
So I think that continues, and I think on a relative basis, tech earnings continue to look pretty good.
And to play along with what you said, we have about a minute left here. Have you you've been bullished lately? Are you still bullish?
I am on a six to twelve month basis. I actually feel better today than I have in quite a while. On the fundamentals. Now, the stock market is already dis koind of a lot of this. This is, you know, stocks trade ahead of the of the data, so you know we are going to have some sort of consolidation. We've been running about that too, probably in the third quarter at some point, but we'd be buyers of that. That's the main message, is that we think we're sort
of beginning a new bull market in April. We're not going anywhere near those lows, even if we have what feels like an overall economic ascension because the market ary diskind of that is looking ahead. So consolidation is a
consolidation if you bought. And what we're really waiting for is sort of a broadening out to make the call that we're going to see some of the small cap stocks work better, some of the consumer discretionary, some of the areas that have really been left behind in the last couple of years, and that's going to be contingent on the FED cutting rates.
All right, Thank you, Mike that and Mike Wilson, Chief US I could be strategist at Morgan Stanley