Strategists at Morgan Stanley, led by Michael Wilson, have reiterated their bullish outlook on US equities for the next 6 to 12 months. According to a recent weekly note, this positive sentiment is driven by an anticipated rebound in both earnings and cash flow. The firm continues to recommend specific trades that align with this outlook.
In terms of sector preferences, Morgan Stanley is maintaining a ‘long’ position on industrials and financials, while also favouring US equities over international markets. Conversely, the firm remains underweight on consumer discretionary goods, citing tariff pressures and diminished pricing power as key concerns. The strategists believe a critical factor influencing market direction is how to interpret the current weakness in lagging macro data.
Wilson highlighted the importance of upcoming economic data, particularly payrolls and the unemployment rate. He suggested that a controlled increase in the unemployment rate, potentially reaching the mid to high 4 per cent range, coupled with payroll figures around the revised three-month average (approximately 0-50,000), would be beneficial for equities. This scenario would likely accelerate market expectations for interest rate cuts and potentially increase the anticipated scale of those cuts.
Following a weaker-than-expected July payroll report, the probability of a September rate cut, as perceived by the bond market, significantly increased. However, Wilson noted that a softer, or at least in-line, Consumer Price Index (CPI) report will be needed to sustain the heightened expectations for a September cut. The July US CPI report is scheduled for release on Tuesday at 10.30pm, Sydney time.
