In short
Mike Wilson (Morgan Stanley CIO and Chief U.S. Equity Strategist) argues U.S. stocks keep rallying mainly because earnings are strong, not because of headlines or the Fed.
Guest backgrounds
No guests; the episode is a solo commentary by Mike Wilson.
Key claims
Earnings are “doing the heavy lifting.” In the S&P 500, typical companies are growing earnings about 16% with median earnings surprises around 6%, the strongest in four years. Strength is broadening beyond big tech into financials, industrials, and consumer cyclicals via higher earnings revisions. Geopolitical and supply-chain/oil pressures exist but are unevenly distributed; energy is a positive earnings contributor and higher-end consumer demand remains resilient, implying cost redistribution and pricing power. Valuation multiples already corrected (P/E down 18% from last fall peak) due to fewer expected Fed cuts/more hikes risk. Liquidity is the main risk, with funding stress episodes coinciding with valuation pressure, partially offset by Fed/Treasury support.
Notable examples
Hyperscalers/semiconductors leading, energy contributing positively, freight/supply-chain/input-cost pressures in chemicals and machinery, and pricing power reflected in above-normal revenue surprises.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOThe Importance of Earnings
0:45 to 2:50
Exploration of why earnings are crucial for equity markets and current performance.
“That's the strongest we've seen in four years.”
Risks and Liquidity Concerns
2:50 to 4:00
Discussion on liquidity risks and their impact on valuations and equities.
“When earnings are growing at an above-trend pace, equities can deliver solid returns regardless of whether the Fed is cutting or not.”
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 in the podcast, I'll be discussing why earnings remain the most important variable for equity markets. It's Monday, May 4th at 2 p.m. in New York, so let's get after it. The more I think about what's been driving this market and the more time I spend with the data, the more I keep coming back to the same conclusion. It's earnings. Not the headlines, not even the Fed. Earnings are doing the heavy lifting right now. When I look at this reporting season, what stands out isn't just resilience, it's strength that's broader than most people appreciate.
0:40Mike Wilson:The typical company in the S &P 500 is growing earnings at about 16%, and the median earnings surprise is running around 6%. That's the strongest we've seen in four years. What's really interesting to me is that this strength is no longer confined to just the biggest tech names. Yeah, hyperscalers and semiconductors are still playing a leading role, but the story is expanding. We're seeing earnings revisions move higher across financials, industrials, and consumer cyclicals in particular. That kind of breath tells me this isn't just a narrow leadership story, it's something more sustainable. At the same time, many investors are focused on the geopolitical backdrop.
1:21Mike Wilson:particularly the Iran conflict and what it means for oil, inflation, and supply chains. To be fair, companies are feeling some of that pressure. When you listen to earnings calls, you hear about rising freight costs, tighter supply chains, and higher input prices across industries like chemicals and machinery. But here's the nuance. Those impacts are uneven. They're not hitting the entire market in the same way. In fact, at the index level, they're being offset. Energy has become a positive contributor to earnings growth, and the higher-end consumer remains relatively strong. Even with higher fuel costs, we're not seeing a meaningful pullback in overall consumption, at least not yet.
2:04Mike Wilson:That tells me that we're not dealing with a classic demand shock. We're dealing with a redistribution of pressure, and companies are adapting. In many cases, they're passing through higher costs. Revenue surprises are running above historical norms, which suggests pricing power is improving. Now, of course, earnings aren't the only piece of the puzzle. Policy still matters, and the shift in rate expectations this year has been meaningful. The Fed has clearly become more concerned about inflation, and the market has repriced expectations to fewer cuts and maybe even a higher probability of hikes.
2:39Mike Wilson:That repricing is a big reason why valuations corrected so sharply over the past six months. It's notable that even with that headwind, equities have managed to stabilize, thanks to earnings. When earnings are growing at an above-trend pace, equities can deliver solid returns regardless of whether the Fed is cutting or not. That said, I do think that there's one area of risk that deserves further attention, and that's liquidity. We've seen periods of funding stress over the past six months, and those moments have coincided with pressure on valuation. The Fed and Treasury have stepped in at times to stabilize these conditions, helping to reduce bond volatility and support equity multiples.
3:21Mike Wilson:Bottom line, we've already had a meaningful correction in valuations this year, with price earnings multiples falling 18 % from their peak last fall. That adjustment occurred as the market digested the many risks that we've been highlighting. Meanwhile, earnings are not only holding up, they're accelerating and broadening across sectors. The risks that we've all focused on, geopolitics, oil, supply chains, are real, but they're being absorbed at the company level. As a result, the price declines were much more modest than the compression in valuations. Meanwhile, monetary policy is providing some headwinds, but it's not overwhelming the earnings story.
4:00Mike Wilson:Equity markets move on two things, earnings and liquidity. Right now, earnings are more than offsetting the lingering liquidity concerns. In short, earnings growth is greater than the valuation reset. This is a classic bull market behavior. And as long as that continues, I think the U.S. equity market will grind higher for the rest of the year with intermittent bouts of volatility. 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.
4:41It 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 the factors behind stock gains across sectors.
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 earnings remain the most important variable for equity markets.
It's Monday, May 4th at 2pm in New York.
So, let’s get after it.
The more I think about what’s been driving this market, and the more time I spend with the data, the more I keep coming back to the same conclusion: it’s earnings. Not the headlines, not even the Fed. Earnings are doing the heavy lifting right now.
When I look at this reporting season, what stands out isn’t just resilience, it’s strength that’s broader than most people appreciate. The typical company in the S&P 500 is growing earnings at about 16 percent, and the median earnings surprise is running around 6 percent. That’s the strongest we’ve seen in four years.
What’s really interesting to me is that this strength is no longer confined to just the biggest tech names. Yes, hyper scalers and semiconductors are still playing a leading role, but the story is expanding. We’re seeing earnings revisions move higher across Financials, Industrials, and Consumer Cyclicals, in particular. That kind of breadth tells me this isn’t just a narrow leadership story; it’s something more sustainable.
At the same time, many investors are focused on the geopolitical backdrop, particularly the Iran conflict and what it means for oil, inflation, and supply chains. To be fair, companies are feeling some of that pressure. When you listen to earnings calls, you hear about rising freight costs, tighter supply chains, and higher input prices across industries like chemicals and machinery.
But here’s the nuance: those impacts are uneven. They’re not hitting the entire market in the same way. In fact, at the index level, they’re being offset. Energy has become a positive contributor to earnings growth, and the higher-end consumer remains relatively strong. Even with higher fuel costs, we’re not seeing a meaningful pullback in overall consumption – at least not yet.
That tells me that we’re not dealing with a classic demand shock. We’re dealing with a redistribution of pressure, and companies are adapting. In many cases, they’re passing through higher costs. Revenue surprises are running above historical norms, which suggests pricing power is improving.
Now, of course, earnings aren’t the only piece of the puzzle. Policy still matters, and the shift in rate expectations this year has been meaningful. The Fed has clearly become more concerned about inflation, and the market has repriced expectations to fewer cuts, and maybe even a higher probability of hikes. That repricing is a big reason why valuations corrected so sharply over the past six months.
It’s notable that even with that headwind, equities have managed to stabilize, thanks to earnings. When earnings are growing at an above-trend pace, equities can deliver solid returns regardless of whether the Fed is cutting or not.
That said, I do think that there’s one area of risk that deserves further attention, and that’s liquidity. We’ve seen periods of funding stress over the past six months, and those moments have coincided with pressure on valuations. The Fed and the Treasury have stepped in at times to stabilize these conditions, helping to reduce bond volatility and support equity multiples.
Bottom line, we have already had a meaningful correction in valuations this year with price earnings multiples falling 18 percent from their peak last fall. That adjustment occurred as the market digested the many risks that we have been highlighting. Meanwhile, earnings are not only holding up, they’re accelerating and broadening across sectors. The risks that we’ve all all focused on – geopolitics, oil, supply chains – are real. But they’re being absorbed at the company level. As a result, the price declines were much more modest than the compression in valuations.
Meanwhile, monetary policy is providing some headwinds, but it’s not overwhelming the earnings story. Equity markets move on two things: earnings and liquidity. Right now, earnings are more than offsetting the lingering liquidity concerns. In short, earnings growth is greater than the valuation reset. This is classic bull market behavior and as long as that continues, I think the U.S. equity market will grind higher for the rest of the year with intermittent bouts of volatility.
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!