In short
Mike Wilson (Morgan Stanley CIO and Chief U.S. Equity Strategist) explains how Fed policy—especially the pace of rate cuts and liquidity conditions—drives near-term and medium-term stock performance, and why the current correction may be nearing its end.
Guest backgrounds
No guest; solo episode by Mike Wilson.
Key claims
Limited S&P 500 downside (~5%) masks worse “under the hood” damage (2/3 of top 1,000 stocks down >10%, 1/4 down >20%). Bitcoin down ~30% and gold hit earlier due to tighter liquidity. He expects more short-term index downside if “BRATF” stays weak, but believes weaker areas are closer to the end of the correction. He argues private labor data show the Fed should cut more aggressively; official data are lagging and delayed (Oct jobs canceled; Nov data not until Dec 16). Liquidity may improve as the Treasury General Account declines with reopening and as the Fed ends quantitative tightening; the clearest signal would be a rally in low-quality, profitless growth stocks over two weeks.
Notable examples
September/Oct Fed meeting dynamics (Oct 29 incremental hawkishness on rate cuts), S&P 500/NASDAQ 100 divergence, and sector/stock repositioning toward small/mid-cap and consumer discretionary.
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 Fed Influence
0:15 to 1:52
Discussion on the relationship between Fed policies and market performance, including insights on various asset classes.
“At the end of September, we discussed the building tension between the Fed and markets in terms of both the Fed funds rate and liquidity, suggesting this had the potential to lead to a correction in the short term.”
Outlook and Investment Strategies
1:52 to 3:45
Exploration of future market outlook and strategic repositioning based on Fed actions.
“This is very much in line with my core view that the rate of change trough in the labor data occurred back in April with the lows in the equity market.”
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, why the Fed may hold the key for both near-term and medium-term stock market performance. It's Monday, November 24th at 1 p.m. in New York, so let's get after it. At the end of September, we discussed the building tension between the Fed and markets in terms of both the Fed funds rate and liquidity, suggesting this had the potential to lead to a correction in the short term. This scenario is playing out with high momentum and low quality stocks responding more to tightening liquidity back in September, while the high quality S &P 500 and NASDAQ 100 responded more to the incremental hawkishness on rate cuts relayed at the October 29th Fed meeting.
0:46Mike Wilson:While downside for the S &P 500 has been limited to just 5%, the damage under the surface has been more significant, with two-thirds of the largest 1 ,000 stocks seeing more than a 10 % drawdown and one quarter down more than 20%. Similarly, Bitcoin is down close to 30 % and topped even earlier than high-momentum stocks. Gold also felt the impact of tighter liquidity earlier than the S &P 500, as one would expect. We're staying vigilant around this dynamic related to monetary policy and can't rule out more index-level downside in the short term, especially if BRATF remains weak. Having said that, we think the weakness under the hood is a sign that we're closer to the end of this correction than the beginning for the weaker areas of the market.
1:32Mike Wilson:Historically, the generals tend to fall the most at the end of corrections. As I said in this podcast back in September, we would view this type of correction and reset on expectations as an opportunity to double down on our rolling recovery thesis, which remains out of consensus. From our perspective, private labor data are showing signs of weakness that suggests the Fed should be cutting rates more aggressively. This is very much in line with my core view that the rate of change trough in the labor data occurred back in April with the lows in the equity market. The official government labor data that the Fed is waiting for is lagging and will simply confirm what we and the markets already know.
2:10Mike Wilson:With the official October jobs data canceled due to the shutdown and the November series not available until December 16th, the equity market may continue to wrestle with the Fed that's dragging its feet and delaying rate cuts. The good news is that we expect a meaningful decline in the Treasury's general account in the coming weeks as the government reopens. This should help to provide a much-needed boost to liquidity at the same time the Fed ends quantitative tightening. The question is whether these changes will be enough to improve liquidity conditions in a durable way. In my view, the clearest indication will be if we see relief in areas of the equity market and asset classes most sensitive to these dynamics over the next two weeks.
2:50Mike Wilson:That means low-quality, profitless growth stocks in the equity world should rally the most. Bottom line, I remain convinced in our bullish 12-month outlook for the S &P 500 and stocks more broadly. Initial feedback from investors to our recently published 2026 outlook indicates that several of our core views for 2026 remain out of consensus. More specifically, our early cycle narrative versus the consensus thinking that we're late cycle, 17 % earnings growth next year versus the consensus at 14%, and finally, our upgrades of small mid-cap stocks and consumer discretionary goods to overweight. Use near-term weakness related to a Fed that is moving too slow for the market's liking to reposition portfolios to sectors and stocks that have lagged behind for most of the past several years, but will benefit the most from a more aggressive Fed action that we expect to come.
3:44Mike Wilson:Thanks for tuning in. 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
Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why investors might want to reassess their portfolios, keeping in mind the gap between market moves and monetary policy.
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, why the Fed may hold the key for both near term and medium-term stock market performance.
It's Monday, November 24th at 1pm in New York.
So, let’s get after it.
At the end of September, we discussed the building tension between the Fed and markets in terms of both the fed funds rate and liquidity, suggesting this had the potential to lead to a correction in the short-term. This scenario is playing out with high momentum and low-quality stocks responding more to tightening liquidity back in September, while the high-quality S&P 500 and Nasdaq 100 responded more to the incremental hawkishness on rate cuts relayed at the October 29th Fed meeting.
While downside for the S&P 500 has been limited to just 5 percent, the damage under the surface has been more significant with two-thirds of the largest 1000 stocks seeing more than a 10 percent drawdown and one quarter down more than 20 percent. Similarly, Bitcoin is down close to 30 percent and topped even earlier than high momentum stocks. Gold also felt the impact of tighter liquidity earlier than the S&P 500, as one would expect.
We’re staying vigilant around this dynamic related to monetary policy and can't rule out more index-level downside in the short-term, especially if breadth remains weak. Having said that, we think the weakness under the hood is a sign that we're closer to the end of this correction than the beginning for the weaker areas of the market. Historically, the Generals tend to fall the most at the end of corrections. As I said on this podcast back in September, we would view this type of correction and reset on expectations as an opportunity to double down on our rolling recovery thesis which remains out of consensus.
From our perspective, private labor data are showing signs of weakness that suggest the Fed should be cutting rates more aggressively. This is very much in line with my core view that the rate of change trough in the labor data occurred back in April with the lows in the equity market. The official government labor data that the Fed is waiting for is lagging and will simply confirm what we, and the markets, already know. With the official October jobs data cancelled due to the shutdown and the November series not available until December 16th, the equity market may continue to wrestle with the Fed that dragging its feet and delaying rate cuts.
The good news is that we expect a meaningful decline in the Treasury’s General Account in the coming weeks as the government re-opens. This should help to provide a much-needed boost to liquidity at the same time the Fed ends quantitative tightening. The question is whether these changes will be enough to improve liquidity conditions in a durable way. In my view, the clearest indication will be if we see relief in areas of the equity market and asset classes most sensitive to these dynamics over the next two weeks. That means low quality profitless growth stocks in the equity world should rally the most.
Bottom line, I remain convinced in our bullish 12-month outlook for the S&P 500 and stocks more broadly. Initial feedback from investors to our recently published 2026 outlook indicates that several of our core views for 2026 remain out of consensus. More specifically, our early cycle narrative versus consensus thinking that we’re late cycle; 17 percent earnings growth next year versus the consensus at 14 percent. And finally, our upgrades of small/mid cap stocks and consumer discretionary goods to overweight. Use near term weakness related to a Fed that is moving too slow for the markets’ liking to reposition portfolio to sectors and stocks that have lagged behind for most of the past several years – but will benefit the most from the more aggressive Fed action that we expect to come.
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!