In short
Morgan Stanley CIO Mike Wilson argues the U.S. equity market’s downside risk may be overstated and that a bull market could be closer than consensus thinks, driven more by interest rates and bond volatility than by Iran/oil or AI disruption.
Guest backgrounds
No guests; the episode is a solo commentary by Mike Wilson (Morgan Stanley CIO and Chief U.S. Equity Strategist).
Key claims
Over half of Russell 3000 stocks are down 20%+ and S&P 500 P/E is down 17%, implying a well-advanced correction. Oil spikes historically end cycles, but today earnings growth is accelerating (~14%) with forward growth >20%, and oil’s YoY move is smaller than recession cases. Equities are now more sensitive to yields due to a Fed hawkish pivot; 10-year yields near 4.5% could compress valuations, but rising bond volatility could trigger a Fed pivot dovish enough to relieve markets. AI near-term impact is efficiency and margin expansion, not a demand shock.
Notable examples
Russell 3000 drawdowns; S&P 500 P/E down 17%; earnings growth ~14% and forward >20%; 10-year Treasury approaching 4.5%; defensive stocks/gold strong early January–late February then underperforming; cyclical sectors outperforming recently.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOMarket Dynamics and Growth Risks
0:45 to 2:46
Discussion on U.S. equity market conditions and growth risks, including oil prices and interest rates.
“More than half of the Russell 3000 stocks are down at least 20 % from their highs, while the S &P 500's price earnings multiple is down 17%.”
Monetary Policy and Bull Market Outlook
2:46 to 4:11
Exploration of monetary policy's impact on market conditions and the potential for a bull market.
“Ironically, it's also what could provide relief.”
Transcript
Automatic transcript. May contain errors.0:00Mike Wilson:Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley CIO and Chief U.S. Equity Strategist. Today on the podcast, I'll be discussing why the balance between the upside and the downside is actually better than at the start of the year. It's Monday, March 30th at 1130 a.m. in New York. So let's get after it. Everyone I've been speaking with lately is focused on the same things. the conflict in Iran, oil prices, and of course, AI, whether it's CapEx, disruption of labor markets, or efficiency. When I look at how markets are trading, I come away with a different conclusion than the consensus.
0:38Mike Wilson:First, the U.S. equity market is far less complacent about growth risks than people think. Consider this. More than half of the Russell 3000 stocks are down at least 20 % from their highs, while the S &P 500's price earnings multiple is down 17%. That's not complacency. That's a well-advanced correction consistent with prior growth scares, if not an outright recession. Second, let's talk about oil, everyone's top concern. Historically, oil spikes have often ended business cycles. However, recessions only occurred when earnings growth was decelerating or outright negative. Today, it's accelerating and running close to 14%, while forward earnings growth is north of 20%.
1:23Mike Wilson:Meanwhile, the magnitude of the oil move on a year-over-year basis is only about half what we saw in the recession outcomes. In other words, the market isn't pricing in a recession because the odds of that happening appear low. Instead, we believe it's pricing in continued uncertainty about oil and other key resources until there is ultimately a resolution where tanker flows resume and prices stabilize or come back down. From my observations, I think interest rates are weighing more heavily on U.S. stocks rather than oil. Specifically, the correlation between equities and yields has flipped deeply negative.
1:59Mike Wilson:Stocks are extremely sensitive to moves in higher yields, more so than they've been in many years. This is mainly due to the recent hawkish pivot by the Fed and other central banks. As a result, we're also approaching the 4.5 % level on 10-year Treasury yields, a point where we typically observe further equity valuation compression. Finally, bond volatility is also rising, and equity valuations are always sensitive to that. The good news is that the Fed is more sensitive to bond than stock volatility, and any further rise could likely lead to a Fed pivot back to a more dovish stance. In short, the tightening in financial conditions driven by rates and bond volatility is the bigger near-term risk, not the geopolitical backdrop.
2:46Mike Wilson:Ironically, it's also what could provide relief. At the end of the day, I still think we're getting closer to the end of this correction, and when I look out to the next 6 or 12 months, the risk-reward looks better today than it did at the start of the year. On the positioning side, I'm also seeing some interesting shifts. Defensive stocks and gold had a strong run from early January right up until tensions in the Middle East began at the end of February. But they have underperformed significantly since. Meanwhile, some of the better performing sectors recently have been the more cyclical ones.
3:21Mike Wilson:That tells me the market got ahead of these concerns and may be ready to look past it sooner than most investors. As for AI, there's still a lot of focus on disruption. But I think the near-term story is more about efficiency and margin expansion. We're not seeing a demand shock that would trigger a traditional labor cycle. Instead, we're seeing companies use AI to right-size costs and improve productivity. Bottom line, the market has already done a lot of the heavy lifting of this correction by discounting the war, higher oil prices, AI, and credit risks. What it's wrestling with now is the risk of a monetary policy mistake with central banks staying too tight for too long.
4:03Mike Wilson:If that hawkish bent starts to ease, which it probably will if bond volatility rises much further, the resumption of the bull market is likely to arrive faster than most expect. 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. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
The stock market has already discounted many disruptions, including geopolitics, oil and AI. Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why investors are now focused on one thing: whether monetary policy stays too tight for too long.
Read more insights from Morgan Stanley.
----- Transcript -----
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 the balance between the upside and the downside is actually better than at the start of the year.
It's Monday, March 30th at 11:30 am in New York.
So, let’s get after it.
Everyone I’ve been speaking with lately is focused on the same things: the conflict in Iran, oil prices, and of course, AI—whether it’s CapEx, disruption of labor markets, and efficiency. When I look at how markets are trading, I come away with a different conclusion than the consensus.
First, the U.S. equity market is far less complacent about growth risks than people think.
Consider this: more than half of the Russell 3000 stocks are down at least 20 percent from their highs, while the S&P 500’s Price/Earnings multiple is down 17 percent. That’s not complacency. That’s a well advanced correction consistent with prior growth scares, if not an outright recession.
Second, let’s talk about oil, everyone’s top concern.
Historically, oil spikes have often ended business cycles. However, recessions only occurred when earnings growth was decelerating or outright negative. Today, it’s accelerating and running close to 14 percent while forward earnings growth is north of 20 percent. Meanwhile, the magnitude of the oil move, on a year-over-year basis, is only about half of what we saw in the recession outcomes.
In other words, the market isn’t pricing in a recession because the odds of that happening appear low. Instead, we believe it’s pricing in continued uncertainty about oil and other key resources until there is ultimately a resolution where tanker flows resume and prices stabilize or come back down.
From my observations, I think interest rates are weighing more heavily on U.S. stocks rather than oil. Specifically, the correlation between equities and yields has flipped deeply negative. Stocks are extremely sensitive to moves in higher yields—more so than they’ve been in years. This is mainly due to the recent hawkish pivot by the Fed and other central banks.
As a result, we’re also approaching the 4.5 percent level on 10-year Treasury yields, a point where we typically observe further equity valuation compression.
Finally, bond volatility is also rising, and equity valuations are always sensitive to that. The good news is that the Fed is more sensitive to bond than stock volatility and any further rise could likely lead to a Fed pivot back to a more dovish stance.
In short, the tightening in financial conditions driven by rates and bond volatility is the bigger near-term risk, not the geopolitical backdrop. Ironically, it’s also what could provide relief. At the end of the day, I still think we’re getting closer to the end of this correction; and when I look at the next 6 to 12 months, the risk-reward looks better today than it did at the start of the year.
On the positioning side, I’m also seeing some interesting shifts.
Defensive stocks and Gold had a strong run from early January right up until tensions in the Middle East began at the end of February. But they have underperformed significantly since. Meanwhile, some of the better-performing sectors recently have been the more cyclical ones. That tells me the market got ahead of these concerns and may be ready to look past it, sooner than most investors.
As for AI, there’s still a lot of focus on disruption, but I think the near-term story is more about efficiency and margin expansion. We’re not seeing a demand shock that would trigger a traditional labor cycle. Instead, we’re seeing companies use AI to right-size costs and improve productivity.
Bottom line, the market has already done a lot of the heavy lifting of this correction by discounting the war, higher oil prices, AI, and credit risks. What it’s wrestling with now is the risk of a monetary policy mistake with central banks staying too tight for too long.
If that hawkish bent starts to ease, which it probably will if bond volatility rises much further, the resumption of the bull market is likely to arrive faster than most expect.
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!