Labor Market & Economic Outlook - Morgan Stanley suggests the labor market may have already bottomed, with any economic slowdown being sector-specific [1] - The firm believes a rolling recession has been occurring, with each sector experiencing its own recession due to post-COVID distortions [2] - Data indicates the rate of change on payrolls and layoffs peaked/bottomed in April, coinciding with the market bottom [2] Federal Reserve Policy - A non-weak labor market could give the Federal Reserve more room to cut rates [4] - The Fed's data is lagged, and revisions show a significant labor recovery [5] - Rate cuts are needed for the financially leveraged parts of the economy, such as housing and consumer goods [8] - The risk of the Fed cutting rates into a good earnings cycle is asset inflation [8] Inflation & Wage Growth - Accelerating inflation is generally good for company earnings, especially for lagging companies, if the Fed isn't raising rates [8] - The current administration aims to address affordability through wage gains, with wage growth needing to outpace inflation [9][10] - Fiscal policy changes are intended to reduce consumption and increase investment, potentially leading to better productivity [11] - Reconfiguring the economy through fiscal policy should lead to better productivity [11] Market Performance & Strategy - Morgan Stanley anticipates 17% earnings growth for the S&P [14] - The firm projects the S&P 500 could reach 7,800, pricing it off of 2027 estimates [14] - A key risk to this strategy is inflation returning to a level that forces the Fed to react by raising rates [15]