In short
Whether the U.S. stock market rally can continue after a possible preliminary U.S.-China trade de-escalation, and what to watch next week (Fed policy/QT and earnings revisions).
Guest backgrounds
No guests; host is Mike Wilson, Morgan Stanley CIO and Chief U.S. Equity Strategist.
Key claims
A preliminary trade deal may avert prohibitively high tariffs, with rare earth shipments continuing and U.S. technology-transfer restrictions easing; fentanyl-related 20% tariffs could still be part of broader talks. Fed likely cuts 25 bps, with growing consensus to end QT, but timing uncertainty could disappoint markets amid wider funding spreads. Earnings revision breadth has rolled over but should reset; continuation depends on stabilization and hyperscaler reactions to aggressive AI CapEx guidance.
Notable examples
rare earths/technology transfers; QT end timing (January/February vs this week); hyperscalers’ AI spending guidance.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOTrade Tensions and Preliminary Agreement
0:17 to 1:06
Discussion on the recent trade tensions between the U.S. and China and a potential preliminary agreement.
“Over the past few weeks, trade tensions between the U.S.”
Federal Reserve Meeting and Monetary Policy
1:06 to 1:58
Overview of expectations for the Federal Reserve's upcoming meeting and potential policy changes.
“Given the sharp sell-off in stocks a few weeks ago on the news of trade tensions re-escalating, it's not surprising that stocks are rallying sharply this morning on news of a possible deal from last week's talks.”
Earnings Revision and Market Impact
1:58 to 2:52
Analysis of earnings revisions and their implications for the stock market, particularly concerning hyperscalers.
“That dispersion in expectations does create some room for disappointment for markets, especially given the recent increase in funding market spreads.”
Market Outlook and Investment Strategy
2:52 to 3:56
Mike Wilson shares his outlook for U.S. stocks and advises on capital deployment.
“Since April, the hyperscaler stocks have rewarded higher guidance on spending.”
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 the remaining hurdles for equities after what appears to be a preliminary trade deal with China. It's Monday, October 27th at 1130 a.m. in New York. So let's get after it. Over the past few weeks, trade tensions between the U.S. and China escalated once again, focused on rare earths and technology transfers with each country playing its strongest card. Over the weekend, it appears that we have at least a preliminary agreement to de-escalate these tensions, which means avoiding a prohibitively high tariffs that were scheduled to go on at the end of this month.
0:41Mike Wilson:While we don't have many details on what has been agreed to, it appears that critical rare earths will continue to ship to the U.S., while technology transfer restrictions by the U.S. to China will ease. Presumably fentanyl tariffs of 20 % on China are likely to be part of any broader agreement between Presidents Trump and Xi if they end up meeting at the upcoming Asia-Pacific Economic Cooperation Forum. Given the sharp sell-off in stocks a few weeks ago on the news of trade tensions re-escalating, it's not surprising that stocks are rallying sharply this morning on news of a possible deal from last week's talks.
1:18Mike Wilson:Our attention now turns to the other big events this week. First, the Federal Reserve is meeting tomorrow and Wednesday to decide its next move on monetary policy. There's a broad consensus view that the Fed will cut another 25 basis points, but there are very different views about how they will address its balance sheet runoff, known as quantitative tightening, or QT. Based on my conversations, there's a growing consensus view for the Fed to announce the end of QT, but uncertainty around the timing. Our house view is for the Fed to wait until the January meeting to make this official, with an end of the program in February.
1:54Mike Wilson:Others believe the Fed could announce something as early as this week. That dispersion in expectations does create some room for disappointment for markets, especially given the recent increase in funding market spreads. More specifically, the widening in spreads suggests banking reserves may already be too low and restrictive for the pickup in economic activity and capital spending that requires more liquidity. Second, earnings revision breadth has rolled over sharply the past few weeks. Most of this decline is due to normal seasonality and the fact that revision's breadth has reached unsustainably high levels since bottoming out in April.
2:32Mike Wilson:Therefore, a reset should be expected as we previewed over a month ago. Nevertheless, it needs to stabilize and push higher again for stocks to continue their advance, in my view. Perhaps more importantly for the S &P 500 is the fact that all of the hyperscalers are reporting this week and will likely determine if revision breadth rebounds. It will also be important to see how those stocks react to what is likely to be continued aggressive guidance on AI CapEx plans. Since April, the hyperscaler stocks have rewarded higher guidance on spending. Should that change, we may see a different tone to how these companies discuss their spending plans.
3:09Mike Wilson:Bottom line, I remain bullish in my 12-month view for U.S. stocks based on what I believe will be better and broader growth in earnings next year. Nevertheless, Alas, the near-term window remains a bit cloudy on trade, Fed policy shifts, and earnings revision breadth. Stay patient with new capital deployment and look to take advantage of downdrafts when they arise like a few weeks ago. 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.
3:47It 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 discusses the outlook for stocks after the preliminary U.S.-China trade agreement and ahead of the Fed meeting and big tech earnings.
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 the remaining hurdles for equities after what appears to be a preliminary trade deal with China.
It's Monday, October 27th at 11:30am in New York.
So, let’s get after it.
Over the past few weeks, trade tensions between the U.S. and China escalated once again focused on rare earths and technology transfers with each country playing its strongest card. Over the weekend, it appears that we have at least a preliminary agreement to de-escalate these tensions which means avoiding prohibitively high tariffs that were scheduled to go on at the end of this month.
While we don’t have many details on what has been agreed to, it appears that critical rare earths will continue to ship to the U.S. while technology transfer restrictions by the U.S. to China will ease. Presumably, Fentanyl tariffs of 20 percent on China are likely to be part of any broader agreement between Presidents Trump and Xi, if they end up meeting at the upcoming Asia Pacific Economic Cooperation forum.
Given the sharp sell-off in stocks a few weeks ago on the news of trade tensions re-escalating, it’s not surprising that stocks are rallying sharply this morning on news of a possible deal from last week’s talks.
Our attention now turns to the other big events this week. First, the Federal Reserve is meeting tomorrow and Wednesday to decide its next move on monetary policy. There is a broad consensus view that the Fed will cut another 25 basis points but there are very different views about how they will address its balance sheet run-off known as quantitative tightening, or QT.
Based on my conversations, there is a growing consensus view for the Fed to announce the end of QT but uncertainty around the timing. Our house view is for the Fed to wait until the January meeting to make this official with an end of the program in February. Others believe the Fed could announce something as early as this week.
That dispersion in expectations does create some room for disappointment from markets, especially given the recent increase in funding market spreads. More specifically, the widening in spreads suggests banking reserves may already be too low and restrictive for the pick-up in economic activity and capital spending that requires more liquidity.
Second, earnings revision breadth has rolled over sharply the past few weeks. Most of this decline is due to normal seasonality and the fact that revisions breadth had reached unsustainably high levels since bottoming out in April. Therefore, a reset should be expected as we previewed over a month ago. Nevertheless, it needs to stabilize and push higher again for stocks to continue their advance in my view.
Perhaps most importantly for the S&P 500 is the fact that all of the hyperscalers are reporting this week and will likely determine if revision breadth rebounds. It will also be important to see how those stocks react to what is likely to be continued aggressive guidance on AI capex plans. Since April, the hyperscaler stocks have rewarded higher guidance on spending. Should that change, we may see a different tone to how these companies discuss their spending plans.
Bottom line, I remain bullish on my 12 month view for U.S. stocks based on what I believe will be better and broader growth in earnings next year. Nevertheless, the near term window remains a bit cloudy on trade, Fed policy shifts and earnings revisions breadth. Stay patient with new capital deployment and look to take advantage of downdrafts when they arise like a few weeks ago.
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!