Morgan Stanley CIO Mike Wilson Talks Upcoming Fed Decision, Markets

Mike Wilson · Morgan Stanley

Under-surface correction is nearly complete; bull market should resume into 2027 after clearing events.

Early 2026 was a broadening rally driven by earnings, which paused in June when the economy hit a mid-cycle transition and leadership narrowed. Wilson argues the under-the-surface correction that began in June is about 80-90% complete. Historically these corrections end when the S&P 500 catches down to breadth, or breadth catches up to the index, and the two metrics his team tracks are converging in the middle. He says the market is in the ninth inning, and the clearing events his team highlighted, including the midterms, should close this chapter so the bull market can continue into 2027.

“So there's been an incredible correction under the surface that started in June for the right reasons, and I think we're probably 80, 90% down there.”at 1:50

Mike Wilson · Morgan Stanley

Stay with quality leaders now; quality factor has been Morgan Stanley's call since June.

Wilson says investors should stay with the market's leaders, which he frames as quality rather than just the Magnificent Seven. Quality as a factor has been Morgan Stanley's recommendation since June, and he expects quality to catch up as corrections end, since the quality index typically gets hit late in a correction.

“Well, I think you stay on board with the leaders for now, which is quality. And it's not just the mag seven, it's quality as a factor, and that's been our call since June.”at 2:23

Mike Wilson · Morgan Stanley

S&P 500 multiple has fallen almost 20% and is cheap enough to discount risks; forward P/E near 16x.

Wilson notes the S&P 500 multiple is down almost 20% from a year ago. A year ago the index traded near 23 times earnings, and it now trades at about 18-19 times, depending on whether equal or market-cap weighting is used. He believes that is cheap enough to show the market has already discounted the major risks, including the earnings deceleration, and he does not think the multiple has to fall much further. He says the multiple could go to about 16 times, though he hedges that with 'maybe'.

“The multiple for the S and P 500 has gone down almost 20% from a year ago... I think the multiple now is cheap enough to basically feel comfortable that it's discounted a lot of these risks.”at 6:16

Mike Wilson · Morgan Stanley

Midterm election market impact is mainly uncertainty, which is largely priced in; legislation won't change much.

Wilson says the midterms matter for markets less through the outcome than through the anxiety leading up to them: the tension, the rhetoric, and the threats of dramatic action after the vote. That uncertainty has been a reason for recent market weakness, and most of it is now priced in. Once the event passes, markets usually realise nothing much has changed, because legislation after a midterm is unlikely to differ dramatically. Wholesale policy shifts tend to come with presidential elections, not midterms.

“Not so much who wins or the magnitude of the win, but just all the anxiety around the tension... So to me, it's the uncertainty factor.”at 3:32

Mike Wilson · Morgan Stanley

Fed's upcoming meeting expected to bring no rate action; market focus will be on press conference tone.

Wilson says the Fed's policy decision was made at the previous meeting and the Fed is now on hold. Markets expect no action at this meeting, and he agrees with that presumption. Among the last three or four meetings, this is the one where the least change is expected. The market reaction will therefore depend on the tone of the press conference and how Fed watchers read it, not on any rate move.

“the expectation is there's nothing gonna be done at this Fed meeting. That was done last meeting, and now they're kind of on hold.”at 4:15

Mike Wilson · Morgan Stanley

Mega-cap AI spending is circular but mostly funded by equity and cash flow; markets have priced in borrowing.

Wilson describes the leading companies as near-monopoly businesses, with the largest ones feeding into the hyperscalers and the hyperscalers feeding back into them, which he calls circular. He acknowledges these companies have been borrowing more recently. He argues the spending is still mostly funded by equity and cash flow, and that markets have already adjusted for the added debt, so this is not a source of alarm.

“So it's kind of a circular thing, but it's all being funded by mostly by equity and cash flow.”at 5:29

Mike Wilson · Morgan Stanley

Market is already discounting next year's earnings growth slowdown, which will mostly come through multiple compression.

Paul Sweeney raised the concern that earnings growth of 20-30% will fall to the mid-teens next year, which is a tough comparison. Wilson says the market is already discounting that deceleration. A year ago many economists and strategists were bearish on growth, despite fiscal stimulus and a large AI capex cycle that was expected to boom next year. The market is now pricing that boom to slow, and Wilson argues it will absorb the slowdown through a lower multiple rather than a collapse in earnings. He says a true growth scare or recession is premature to call.

“But in other words, the market is discounting the deceleration that you talked about... So now what the market's forecasting is that boom is gonna decelerate.”at 7:16

Mike Wilson · Morgan Stanley

Inflation is a major reason the stock market has risen so much since COVID; the economy is nominal.

When discussing the large wealth figures in current offerings and deals, Wilson points to rising costs, such as stadium costs, as an example of inflation. He says a large part of why the stock market has done so well since COVID is inflation, and that Morgan Stanley has written about this at length. He concludes that the economy is nominal, so investors need to ask whether they are really outpacing the world or just keeping up with rising prices.

“A lot of the reason why the stock market has done so well since COVID is inflation.”at 8:29