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 US 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.
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 US, while technology transfer restrictions by the US 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 and 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'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.
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.
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 SP 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 US 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 revision breadth.
Stay patient with new capital deployment and look to take advantage of downdrafts when they arise, like a few weeks ago.
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