Morgan Stanley's Michael Wilson thinks the Fed has been slow to cut rates into the start of a new bull market, which could mean more rate cuts in 2026 than expected, supporting stocks. Wilson's view underpins Morgan Stanley's bullish take on U.S. stocks, contrasting others' calls for anemic growth in the coming years. Investors can find confirmation that a new bull market began in April in S&P 500 constituents' earnings, which are now growing close to 10%, the best in four years, according to Wilson. "That ...

Core Insights - McDonald's earnings report indicates a challenging economic environment, with younger Americans cutting back on spending, a trend echoed by other brands like Cava, Coca-Cola, and Chipotle [1][2] - There is a noticeable divide in consumer spending, where the wealthy continue to spend while the working class is more value-conscious [2][19] - The consumer discretionary sector is underperforming, with a 6% decline in the retail spider (XRT) over the last month, suggesting mixed signals about consumer strength [2][9] Company-Specific Insights - McDonald's is facing challenges related to rising meal prices, with meals now costing between $15 to $20, leading to a perception that fast food is no longer a value option [6][12] - The introduction of a $5 meal deal did resonate with consumers, but it has not significantly impacted stock performance [6][17] - McDonald's is testing new products like crafted sodas and refreshers in select stores, aiming to attract customers during low-traffic periods [7][8] Industry Trends - The rise of GLP-1 drugs, projected to become the best-selling drugs in the U.S. at over $30 billion annually, reflects changing consumer health consciousness [3] - Consumer staples are also struggling, with 32 out of 37 stocks in the sector showing negative performance, indicating a potential rolling recession [9][10] - The K-shaped recovery is evident, with the top 10% of earners responsible for half of consumer spending, while the bottom half faces increasing financial strain [19][20]

Core Insights - A top Wall Street analyst suggests that the current earnings season validates the thesis of a "rolling recovery" in the economy, indicating that the "rolling recession" is retreating into the past [1][2] Group 1: Economic Context - The U.S. private sector has experienced a "rolling recession" during the pandemic, characterized by a prolonged downturn that did not reflect in headline GDP but affected hiring, earnings, and confidence [2] - The current earnings season shows revenue "beat" rates more than double historical averages, with median stock earnings growth reaching its fastest pace since 2021 [2] - The S&P 500's collective revenue surprise stands at 2.3%, compared to a historical norm of 1.1%, indicating stabilization and firming top-line momentum [2] Group 2: Earnings Recovery - The third quarter of 2023 marks the end of one of the longest earnings recessions on record, with median stock earnings growth among the Russell 3000 hitting 11%, up from 6% in the previous quarter [3] - Earnings revisions made a "V-shaped" recovery in April, which is seen as an inflection point for the economic cycle [3] Group 3: Cost Structures and Profitability - Companies have significantly leaner cost structures due to rightsizing during the downturn, with wage expenses decreasing in growth rate terms [4] - The reduction in excess labor costs during the rolling recession has aligned wage expenses with profitability, positioning businesses to benefit from top-line improvements [4] - A slight firming in top-line performance and pricing power is expected to lead to greater bottom-line leverage due to restrained costs [4]

Market Outlook - The market is currently experiencing increased volatility, but there is a long-term view that conditions will remain favorable for a while [2][3] - The economy has been in a rolling recession for the past two to three years, but is now transitioning into a rolling recovery [2][4] Economic Cycles - The recession ended with significant layoffs, and the stock market has adjusted accordingly, indicating a new economic cycle [3][4] - Earnings revisions have surged, suggesting the beginning of a new economic cycle [4] Inflation and Interest Rates - The current economic environment is characterized by inflation, which differs from previous low-inflation periods [5][20] - The Federal Reserve is expected to cut rates more significantly, potentially by over 150 basis points, contingent on weaker labor data [12][11] Investment Strategy - A barbell investment strategy is favored, with a focus on both cyclical sectors like technology, financials, and industrials, as well as defensive sectors such as healthcare [7][8] - There is an expectation for a market expansion as the recovery progresses, similar to trends observed in 2021 [7] Short-term Risks - Potential short-term corrections may arise due to U.S.-China trade tensions and funding market stress, but these are not expected to derail the overall recovery outlook [14][16] - A 10% correction could occur, but it would not revert the market to previous lows [15] Earnings Growth - Inflation is not inherently negative for stocks, as it can drive earnings growth, although it poses challenges for consumers [20][21] - The outlook for next year's earnings is positive, with expectations for a capital expenditure boom [22]

Core Viewpoint - The U.S. economy is experiencing a "rolling recovery" despite current market volatility and investor skepticism, with potential for an economic boom in various sectors over the next six to twelve months [1][2]. Economic Outlook - Morgan Stanley's chief equity analyst, Mike Wilson, has shifted from a "rolling recession" perspective to a "rolling recovery" since April, indicating an early-stage economic boom [1]. - The economy has consistently surprised positively throughout 2025, despite warnings from skeptics regarding tariffs and macroeconomic uncertainties [2]. Earnings Performance - Third-quarter earnings have raised some concerns for Wilson, as investors are jittery and companies are not significantly raising guidance, reflecting a cautious outlook [2]. - The financial sector's earnings season has begun with total EPS surprises averaging almost 6%, which is above historical norms, yet the market's reaction has been muted [3]. Market Sentiment - Despite companies beating earnings expectations, investor confidence remains low, particularly in economically sensitive sectors like regional banks and capital goods [3]. - Wilson notes that unresolved risks are weighing heavily on traders' minds, contributing to a choppy market environment [2]. Future Catalysts - Potential catalysts for a powerful upswing in equities include de-escalation of trade tensions, stabilization of EPS revisions, and improved liquidity [2]. - Upcoming policy developments, such as anticipated trade negotiations at the APEC summit, are viewed as potential positive influences on the market [2]. Risks and Corrections - Wilson remains cautious about the possibility of a near-term correction in the stock market, citing recent credit market stress and scrutiny of regional banks following unexpected credit losses [2].

Summary of Key Points from the Conference Call Industry Overview - The discussion revolves around the US equity market and the Federal Reserve's monetary policy, particularly in the context of a potential economic recovery and the implications for earnings growth and inflation. Core Insights and Arguments 1. **Transition from Recession to Recovery**: The analysis suggests that the rolling recession has ended, and the market is transitioning to an early cycle recovery, indicated by positive operating leverage, falling wage costs, and pent-up demand across various sectors [4][6][10]. 2. **Earnings Revisions and Economic Indicators**: There is a notable acceleration in earnings revisions breadth, which is expected to signal a material increase in the ISM PMI, suggesting stronger-than-expected earnings growth [4][10]. 3. **Fed's Monetary Policy**: The recent 25 basis points cut by the Fed is viewed as a "hawkish cut," and there is concern that the Fed may not be responding quickly enough to market expectations, particularly regarding labor market data [4][20][28]. 4. **Inflation and Revenue Growth**: The correlation between inflation and revenue growth is emphasized, with the expectation that if the Fed cuts rates while inflation remains elevated, revenue and earnings growth could exceed expectations [5][23]. 5. **Market Dynamics and Small Caps**: The report discusses the potential for small-cap stocks to outperform once the Fed adopts a more accommodative stance, as historically, small caps tend to perform better when the Fed is ahead of the curve [27][29]. Additional Important Insights 1. **Labor Market Dynamics**: The analysis indicates that the labor market has been in a rolling recession, with government hiring masking underlying weaknesses. The true state of the labor market may not be reflected until later data releases [27][28]. 2. **Liquidity Concerns**: There are signs of tightening liquidity due to the Fed's quantitative tightening and increased Treasury supply, which could lead to market corrections if not addressed [32]. 3. **Sector Performance**: The report includes a fresh money buy list with various companies, indicating a focus on sectors like healthcare, real estate, and consumer staples, while noting the performance of these stocks relative to the S&P 500 [37][50]. 4. **Market Sentiment and Technical Indicators**: The report highlights the importance of monitoring bond volatility and the spread between SOFR and Fed Funds as indicators of potential market corrections [32][36]. This summary encapsulates the key points discussed in the conference call, focusing on the implications for the US equity market, the Federal Reserve's actions, and the overall economic outlook.