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So markets got very over sold last week with the S and P touching correction territory. That's from Morgan Stanley saying, well, we don't think investors should view a relief rally from over sold levels as a sign that volatility is subsiding in a durable manner to speed. An uncertainty around the new policy introduction is denting investor, consumer and corporate confidence. For more on this notice, the author himself, Mike Wilson,
Chief Investment Officer over at Morgan Stanley, is this. So where are we right now within the market.
So good afternoon and thanks for having me on. Look, I think so far the markets have played out I guess the way we thought they might have, which is that the growth expectations are coming down for all the reasons you mentioned, in addition to the fact that we had, you know, kind of a euphoric state at the end of last year. The Fed stop cutting interest rates in December, and we have this sort of questions around you know, the sustainability of AI cap back, you know, growth acceleration.
So the market had to absorb all these different things and that they're all pretty much growth negative in the short term, and that's how we saw it kind of playing out this year. That's fifty five hundred. That was a low end of our range. We got there. Now, the question Alex as you you know we're kind of going through, is you know, we don't really know yet how this is going to play through into the second and third quarter. So I think it's about time now.
Maybe we don't have to take out fifty five hundred. Maybe we do, depending on if the government recession, if you want to call it a government recession, turns into something more broad across the broader economy. And then of course, the Fed yesterday you know, kind of showed their hand. I would say, you know, they reduced the balance sheet reduction by twenty billion a month and that was unexpected. There was also some concern they might take you know,
a hike out of their dot plot. They didn't do that. So, as we wrote last week, we think, you know, maybe there's not a Trump put here as people were kind of hoping for, but the Fed is still there, and if we do have you know, worse growth outcome, I think the FED will react pretty pretty quickly. Like last fall.
So when you mentioned waiting for the good side, right. We tend to think we just got to get past April. Second, is it actually going to be later in the year we actually have to get to tax cuts and deregulation and what that looks like before anything can really be solved.
Yeah, I would suspect that, you know, earning your vision breath, and that's something we track closely as well as maybe economic surprises maybe don't start to turn up until you know, the fourth quarter, and in fact, the administration is sort of even targeting that. But remember stocks are forward thinking, so it doesn't mean that that, you know, stocks have
to languish all the way until the fourth quarter. We could see things sort of you know, probably drop out either now in certain certain circumstances where stocks have really been hit hard, or it may take until the summer or the fall, but it's going to be kind of we had a rolling, kind of rolling correction. This is going to be a rolling recovery, is my best guess.
Okay, rolling recovery where you see some so called low quality stocks driving this short term rally. What what constitutes a low quality stock.
Like, well, I mean a bad balance sheet, you know, too much leverage, low margins, not that profitable, so that those are the kinds of stocks that tend to do
the best when it's sort of a relief rally. So we're not advocating that those should be core positions, but that you know, if in fact, it is a low quality rally kind of leading us for the next week or two, that would just inform us that we probably have more you know, wood to chop in terms of the broader market finding you know, finding it's footing and
being able to make a march towards new highs. We think new highs are probably out of the question in the first half of this year, but this is but by the second half, it's very plausible as we look forward to twenty twenty six.
In the anytime, we've seen the dollar come off its heights too from mid January, so lost a lot of ground recently. At some point that recent dollar weakness will help earnings for a lot of the S and P five hundred companies that rely on overseas sales, won't it.
That's exactly right, and that was one of our concerns coming into this year, is that the dollar is very high and rates were high. So now that's reversed, right, you have lower rates and you have a lower dollar. And quite frankly, this this relative trade versus Europe, I think could go the other way now as we go into earning season. I mean, you're benefited from the stronger dollar, you know, into first quarter you know period, and that
was one of the big positive drivers for Europe. Now as they report first quarter earnings, it could be the exact opposite. So that trade, that relative trade, we think has kind of gone fully. So I would advocate sort of S and P five hundred over Europe now on a rebound trade that direction.
Oh that's interesting, But then what about all the money that Germany is spending, Like you think that that doesn't hold enough water to really cycle through the market as much.
Well, Germany's up seventeen percent this year, so I think you've discounted quite a bit of that. And once again, you know, just in the very near term, this is more tactically speaking that you know that the revision factors for Europe should look weaker relative to the US, just based on that currency factor that that Scarlett was asking about.
When you take a look at the NASAC and mag seven say, in particular, is that sort of its own beast in essence, because there was that euphoria and that was you can make an argument and over evaluation. Is that a little different from what the mess of the market has to sort of manage right now with that headline.
Risk, Well, we're seeing to bring up Max seven because that too is a situation where the earnings revisions have rolled over harder than the rest of the market, and that's why that group is underperformed. But we're starting to notice now in our data we look at this daily that that's flattening out now and that may actually pick up.
And remember, the Max seven will benefit from that weeker dollar feature, So I think that there may be a trade there as well to maybe kind of buy back into the MAG seven relative to the four ninety three or kind of the equal weight where you know, we've seen pretty significant underperformance over the last couple of.
Months, so we have this rally recovery rally, but it's not a durable rally as you've seen that suggests that there's more downside ahead. Do you anticipate next time around that there's going to be more force selling. I don't get the sense that we got that this last time and so as a result, we didn't really reach capitulation.
Well I don't know about that. I mean, we got as over sold as we saw during twenty twenty two, and we did see some force selling from some of the systematic strategies and some of the more levered players out there. For sure, we definitely didn't see force selling in the retail community. But we may not see that. You know, the retail community, you know, has made a lot of money the last few years, and they have a lot of cash on the sidelines, so maybe they're
in better shape. They don't, they don't get to that position. What we're looking for, quite frankly, is not so much technical. Uh, it's more on the on the revision side. We need to see Earning's revisions stabilize and then start to turn up again for this to become a rally that can lead to new highs. When I say it's not a durable rally, it doesn't mean we have to go lower. It just means we're going to chop around, yes, and
that's a difficult environment. It's a trading environment, and it's fine if you're a trader, but as an investor, you know it's going to be noisy, and so don't you know, you don't need to be rash here thinking you're missing something. Either way, it is a trading environment. The ball is going to stay high, as we said, and we think it will work its way through over the next two quarters, and by the second half of the year we should see better visibility on twenty six grows getting better.
So like, which sectors would you want to be in as sectors that may give guidance that you know moves to the upside.
So I think you know, we've been very focused on four sectors where the revisions have been good, as financial, software, media, entertainment, and some of the consumer services sectors. Some of those are starting to flatten out a little bit. And then we've seen relative strength now lately in the defensive sectors, most notably utilities and some of the staples areas not
on revisions but on price. So I think the Barbelle sort of between those four sectors I mentioned where revisions are good and a little bit of defensiveness in the portfolio still makes sense probably going into the second quarter.
All right, really a pleasure to have you on, Mike. Thank you so much for joining us today. Mike Wilson over at Morgan Stanley talking about this tradable rally, A choppy rally here around the fifty five hundred level,