Mike Wilson on Earnings Recovery, Fed Policy, and Market Outlook

Government Shutdown Aftermath

• ⚠️ The recent government shutdown posed a risk to both economic growth and financial liquidity, but its end has brought a sigh of relief.
• 📌 However, fundamental issues remain unresolved, suggesting the shutdown could re-emerge as early as January.

Data Reliability and Fed Policy

• 📊 The shutdown may delay crucial economic data releases like CPI and jobs reports, impacting the Fed's ability to cut rates.
• 📉 Data collection has become erratic and less reliable post-COVID, complicating the Fed's decision-making process.
• 💡 The Fed is likely moving slower on rate cuts than usual due to inflation volatility, creating a tension with market expectations.

Interest Rate Cut Expectations

• 🎯 The market anticipates approximately three to three and a half rate cuts by the end of next year, while Wilson forecasts five to six.
• 🚀 Lowering the base rate is seen as necessary for the private economy to gain momentum.
• 📈 The Fed funds rate is currently above the 2-year Treasury yield, and Wilson expects broadening market performance once the Fed gets below this level.

Earnings and Market Broadening

• 📈 Morgan Stanley's Michael Wilson sees clear signs of an earnings recovery underway, with double-digit year-over-year earnings growth for median stocks in Q3.
• 💡 This earnings improvement, coupled with pent-up demand and potential policy changes, is expected to lead to broader market performance in 2026.
• 💰 The market has been narrow, partly due to the need for lower rates to stimulate the private economy.
• 📊 Wilson believes the consensus for earnings revisions next year is achievable, with his firm releasing a more detailed outlook soon.

Economic Outlook

• 🐂 The worst of the economic slowdown appears to be behind us, with the market having priced in this downturn and now entering a new bull market.
• ⚖️ Currently, there seems to be a decent balancing act between the economy, market expectations, and monetary policy.