Mike Wilson on Fed Policy, Earnings, and the Bull Market Outlook

Fed Policy and Interest Rate Outlook

• 💡 Jay Powell's tone at Jackson Hole is expected to be balanced, emphasizing inflation control before rate cuts.
• 🎯 The market is pricing in a high chance of a Fed cut in September, but the house view is for no cuts this year.
• ⚠️ A potential disappointment for markets would be if the probability of a September cut falls significantly from its current 80-90%.
• 🧠 The Fed may be hesitant to cut rates due to lingering concerns from 2021, creating a balancing act.

Earnings and Tariff Impact

• 🚀 Earnings revisions have been explosive and are driving stock prices higher, even amidst slowing growth.
• ⚠️ Tariffs pose a potential risk to profit margins in consumer discretionary sectors where companies have less pricing power.
• 🧩 This margin pressure is expected to be idiosyncratic, affecting individual companies rather than the broader S&P 500.
• 📊 Tariffs are likely to be a shared cost among exporters, importers, and consumers, with some unable to pass costs on.

Tech Sector Performance

• ⚡ Tech earnings have been driven by a rebound in AI capex and an overall IT capex cycle bottoming out.
• 📉 A deceleration in AI capex last year caused many tech stocks to perform poorly in the first quarter.
• 💡 There's a view that the market has been too bearish on software, as overall spending is now emerging from a slowdown.

Bullish Market Outlook

• ✅ The strategist remains bullish on a six to 12-month basis, feeling better about fundamentals.
• 📈 Stocks have already discounted much of the positive outlook, and the market is seen as beginning a new bull market that started in April.
• ⚠️ While consolidation is expected in the third quarter, it's viewed as a buying opportunity.
• 🎯 A broadening out of market participation, including small caps and consumer discretionary stocks, is contingent on the Fed cutting rates.